The biggest threat to China’s political stability since the current leadership’s smooth transition is brewing rapidly in Shanghai stockbrokers’ offices.

Mug punters are coming in from the street with bags of money at the rate of 200,000 a day to open trading accounts. There are already 55 million individual accounts and the pace is accelerating.

The 200,000 figure is the lower of the two numbers I was given by Shanghai Stock Exchange officials while in the city last week for the Australian Institute of Company Directors conference. The other was 250,000. The bubble is swelling at such a pace that a 25% discrepancy matters little.

SSE executive vice-president Dr James Liu acknowledged some of the problems. The exchange is flat out handling the massive trading volume, making supervision “very difficult” – which could translate into minimal supervision and therefore rampant abuses. The market is a casino.

The new punters have no idea or little idea about what they’re doing. Dr Liu tells of investors asking if they can watch their shares rise at night and over the weekend as well as during the day. They’ve started gearing up, borrowing against their houses.

On Friday Dr Liu said the Shanghai market’s price/earnings ratio was between 40 and 50. Bloomberg today says 43 compared with the Dow’s 18.

Economist David Hale recalls the last Shanghai share bubble saw the PE ratio run to 60 before bursting. If that’s how far the parcel is passed this time before the music ends and present rates of growth are maintained, there could be the thick end of 80 million Chinese punting the market when it collapses later this year.

The market collapse itself wouldn’t matter – the Shanghai casino doesn’t reflect the Chinese economy – but 80 million angry citizens are another matter.

The bursting of every bubble results in anger as the mugs look for someone to blame and politicians want to be seen to do something to avoid the blame resting on them. Poseidon, Enron, HIH – there’s a predictable pattern.

The immediate targets will be the brokers currently raking in vast fortunes. They might want to make sure they have their passports and visas in good order.

The exchange itself will not escape overdue scrutiny and reform but some of the flak will inevitably catch Beijing as well.

In February a rumour of reform was enough to knock 9% off the market in a day. That should have just been the start of the correction, but Beijing took fright and left it in the too hard basket.

China remains a totalitarian police state with an increasing market orientation, but no regime can afford too many unhappy citizens. And Australia’s prosperity and all the promises from both sides of politics depends on China’s government remaining stable.