Beijing: Cheng Siwei, a financial authority and vice chairman of the standing committee of the National People's Congress that is currently holding its fifth session in Beijing, warned that a bubble was developing in the stock market, while a survey by the Chinese central bank last year showed 42 per cent of Chinese bankers believed the economy was overheating.

In 2006 China's stock market soared by 130 per cent, while real estate prices have surged in the past five years, sparking of memories of the its economy overheating and the stock market developing in to a bubble like Japan in the 1980s.

In the 1990 the Tokyo stock market fell 38 per cent, wiping out $2.07 trillion while Japan tightened its monetary policies.

However, US-based global investment bank Goldman Sachs has allayed fears that China, now the fourth largest economy, could follow Japan's economic 'bubble' of the 1980s that could pull down the rest of the world.

The Goldman Sachs report said that though China now, and Japan then shared a few macro similarities, a more open economy and markets, stricter forex controls and better developed corporate governance could prevent China from repeating Japan's boom-bust experience.

The official Xinhua news agency quoted the report as saying, "In China, the foreign currency exchange mechanism is relatively inflexible as the Chinese government is still in the process of gradually liberalising the capital account by imposing a daily movement of 0.3 percentage for yuan against the US dollar."

On Monday, Chinese Premier Wen Jiabo had told the parliament that the government would follow a "prudent" monetary policy and employ a full range of monetary policy tools to appropriately control the supply of money and credit and effectively address the problem of excess liquidity in the banking system.