Last updated at: (Beijing Time) Monday, March 03, 2003 Dialogue Between Chinese and American Experts on Real Estate 'Bubbles' At a seminar themed "Chinese finance: towards rational exuberance" held last week in Beijing, an interesting dialogue was made between Robert Shiller, professor of economy from the Yale University and founder of behavioral finance, and Wu Jinglian, a noted Chinese economist, on the problem of bubbles on realty market.
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At a seminar themed "Chinese finance: towards rational exuberance" last week, an interesting dialogue was made between Robert Shiller, professor of economy from the Yale University and founder of behavioral finance, and Wu Jinglian, a noted Chinese economist, on the problem of bubbles on realty market.
In his book "Irrational Exuberance" in 2000, professor Shiller warned the US to guard against the "bubble crisis" plaguing the stock market. Soon after his book was published in March, the US stock market witnessed a violent quake with the Dow Jones index to drop by 20 percent from the historical record of 11,700 points within weeks and the Nasdaq index fell over 30 percent. Shiller's analysis on reason of "bubble crisis" was proven by fact and this earned him the fame of a "bubble" scholar.
Commenting on Shanghai stock market, prof. Shiller pointed out that judging from the statistics of A share from June 1997 to February 2003, the Shanghai market didn't form the so-called "bottom" and "crest" in real terms. "The Chinese stock market is the world only one being based on public ownership", he explained, "this is very special, so the bubbles turned out less violent than that on the US market. Even when the US market fell into crisis in 2002, the Chinese market remained not quite ruffled".
When asked how to view prof. Wu's arguments as to "there exists bubbles on Chinese stock market, and China's stock market is no more than a gambling party", Shiller said, "of course, I know the Chinese stock market no better than that of the US, and you will never lodge an absolutely correct judgment when it comes to stock market. But one point is certain, one of the reasons that the Chinese market has not been much influenced even by now, that is the market, by nature, is still not an open one".
For this, Wu Jinglian said that in 2001 some people said he was trying to "fly off from the earth by pulling his hair", but now who would pretend to say there exists no bubble on the stock market? Now what we are going to discuss are how big the bubbles are on earth, and when will they burst. You must know they would burst one day, and we must make predictions before that in order, especially, to protect investors' interests as much as possible.
As for the blooming real estate markets from Beijing to Shanghai, Wu said it's even harder to answer whether bubbles exist in the realty market than the stock market, but believes that those who claim no bubble in real estate have insufficient grounds to support themselves.
Wu said that you couldn't base your "no bubble" theory on the decrease rate of unoccupied houses. Besides, many people buy houses only for investment instead of living by themselves. Once investment becomes the goal there will be no difference with the stock market. The rate may rise today, and fall tomorrow, and it's natural to have bubbles.
Shiller said, although he didn't conduct profound studies on China's real estate market, a universal phenomenon is that real estate bubbles exist in whatever charming cities of the world, from Boston to New York, from London to Sydney. Both long-term rising and falling of real estate market create bubbles and this is also an inexorable law.
By PD Online Staff Li Heng
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Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901
