LAST year the Chinese market rose 130%. This year it’s already up another 45%. About 300,000 new trading accounts are opened every day and one-third of listed companies are valued at more than 60 times earnings.

So when Zhou Xiaochuan, governor of the People’s Bank of China, was asked a few weeks ago whether a bubble was forming in the market it wasn’t that hard for him to figure out the answer. Yes, he said.

It is hard to find a market that isn’t in bubble territory these days. Take the art market. Extreme prices are paid for mediocre art every week and, as if to signal the top of the market, a new hedge fund has just been announced. Set to launch in the summer, the Art Trading fund will buy work direct from a group of contemporary artists, among others, and hedge its exposure using derivatives.

But what of the more main-stream markets, the ones where most of us put our money? Are American and UK equity markets booming or bubbling?

Look first at the US. Here the economy is a mess. On the face of it consumption (the main driver of economic growth) looks fine, but peer behind the headline numbers and you’ll see how the spending is being financed – and it isn’t very encouraging.

Consumer credit rose sharply in March by $13.5 billion (£6.8 billion) suggesting, said Christopher Wood of CLSA, a broker, that with house prices no longer rising and “the home credit equity line cut off”, American consumers are turning to their credit cards.

Mastercard saw the number of transactions using its cards rise by nearly 20% in the first quarter of 2007. That’s clearly not sustainable. Even with the growth in card use, consumer spending rose at its slowest pace for five months in March. Economic growth fell to a miserable 1.3% in the first quarter, a four-year low, and there could easily be a further – and entirely justified – growth scare ahead.

Indeed, if the housing market continues to suffer – note that existing home sales fell 8.4% in March, the biggest drop in 18 years – it is possible the economy might stop growing altogether.

Yet even against this background the Dow Jones index has been rising steadily almost every day since the hiccup of late February. Most forecasts have it continuing to do so and a can’t-lose mentality appears to have taken hold of markets. By the end of March the amount of debt taken on by investors specifically to buy shares totalled £318 billion. That’s more than in March 2000 – the peak of the tech bubble.

In Britain the situation is much the same. House prices are stagnant in much of the country (London excepted) and with the latest interest-rate rise yet to bite, it is hard to be entirely confident that the economy will look so good under Gordon Brown’s premiership as it did with him as chancellor.

Yet the FTSE 100 hit a six-year high a few weeks ago and its strong run is expected to continue throughout the summer.

The problem here is that the waters of the market have been muddied by private equity. When traders and managers talk about stocks, they don’t speak in terms of valuations any more. They talk about the “wall of money” sitting on the sidelines of the market looking for a deal.

Investors aren’t looking to see what might happen to profits or showing any interest in the economy, but are simply placing their bets on bids. Such is the speculative fever that even huge stocks are seeing the kind of volatility one usually associates with smaller firms listed on AIM.

Two weeks ago Rio Tinto jumped 11% in one day on nothing more than the rumour of an approach. This doesn’t make much sense. It is possible the likes of Rio could be bid for, but not likely. The market is behaving as though everything is not just a potential target, but a definite one. But private equity can’t actually take over everything so buying shares in companies in the hope they will go private is not investing but speculating.

That’s not to say there isn’t money to be made this summer, but when the fundamentals are as shaky as they are, markets can’t be driven forward by merger momentum for ever.

One market that is singularly lacking in momentum at the moment is Japan where the Nikkei 225 index has so far risen a measly 1% this year.

I’ve written before about how I think it should be doing rather better. It is partly because Japan has seen none of the exciting mergers and acquisitions activity that the rest of the world has been getting excited about, but also because people aren’t convinced that deflation really has been banished and that consumption really will pick up.

With this in mind I want to point to what Jonathan Allum of KBC, a consultancy, calls “big news”. Japanese food producer QP is to raise mayonnaise prices. From June 1, its standard mayonnaise will cost 10% more. To the outsider’s eye this may seem a trivial matter but, said Allum, it is not. It is the first time “any branded mass-market condiment has put in a price rise for at least a decade”. As such it could suggest that QP at least is confident enough in consumer spending that it thinks price rises might finally be able to stick.

I’m in Tokyo this week. Next week I’ll let you know if I think QP is right and what that might mean for the Japanese market. Merryn Somerset Webb is a former stockbroker and now editor of Money Week. Her views are personal and investors should always seek professional advice.

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