Figure 1 Guangzhou-world Price Difference: Flow-on Effects to Imports of round Steel Bars

The Working Paper series provides a means for circulating preliminary research results by members of, or visitors associated with, the Chinese Economies Research Centre. To facilitate prompt distribution, papers are screened but not formally refereed. 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 (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. – 4 – 1 INTRODUCTION During the period 1992 to 1996, Chinese metallurgical industry officials frequently asserted that steel imports were " blind " (mangmu jinkou). These officials believed that steel imports continued to flow into China irrespective of whether there were arbitrage profits to be made from such activities. The commonly held opinion was that not only were steel import merchants damaging their own self-interests, but that they were also damaging economic prospects for Chinese domestic steel producers (by severely depressing local market prices). There is piecemeal evidence to support the Chinese argument. Dickson (May 1997) notes that in 1993, foreign banks and clearing houses in Hong Kong began to take a cautious view about issuing letters of credit for steel imports into China. Steel import activities were considered risky. Many Chinese steel importers tried to extract themselves from contractual commitments to pay for steel ordered earlier when they discovered that domestic steel prices were falling, …