Testing the Hypothesis of Irrational Exuberance in China's Steel Imports, 1992-1996

Ian Dickson

No 1997-17, Chinese Economies Research Centre (CERC) Working Papers from University of Adelaide, Chinese Economies Research Centre

Abstract: This paper outlines and applies a methodology for testing the hypothesis, put forward by Chinese metallurgical industry officials, that steel imports into China during the period 1992-1996 were exuberant or "blind". Domestic Chinese industrialists, who had a vested interest in protecting the home steel market from competing imports, believed that traders were importing such a large volume of steel product that it spoilt the market for both domestic producers and importers alike. In other words, traders were considered irrational and as acting contrary to their own self-interests. The methodology used to empirically test this hypothesis was developed by Spiller & Huang (1986) and by Sexton, Kling & Carman (1991), has its genesis in the production frontier work of Aigner, Lovell and Schmidt (1977), and has been labelled the "Parity Bounds Model" (PBM). The methodology is further extended and adapted in the present paper. The main findings of this paper include that the PBM model has a sound, logical and intuitively appealing derivation, but that feasibility of estimation is a significant problem with the model. However, if this and other problems are momentarily put aside, statistical tests using the model suggest only lukewarm support for the proposition put forward by Chinese metallurgical industry officials that steel importers were acting in a "blind", irrational or counter-productive manner.

Date: 1997
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