Nobel laureate Robert Shiller, who is best known for accurately predicting the collapse of the property market in the Untied States, which triggered the financial crisis of 2008, has warned that the Chinese property market is facing a similar calamity.

His prognosis has stirred a hot debate in the media and on the Internet. But while conceding that property prices have continued to rise, especially in major cities, to levels fewer and fewer people can afford, many economists in government think tanks and academia were eager to sooth market nerves by noting the fundamental differences between the Chinese economy and that of the US.

In China, these unwavering optimists contended, brutal market forces that made an adjustment so painful in the US and some other economies, can be tempered by administrative as well as monetary measures. Indeed, the market is expecting the government to introduce stronger measures to deflate the property bubble in the coming months. Many analysts believe a nationwide adjustment will only be brought about by a substantial hike in borrowing costs.

However, there are those who warn that the property sector is like the genie that has grown too big and wild to be put back into the bottle. What the authorities can, or should, do, they said, is to contain the potential damage of the fallout of what is widely believed to be an inevitable adjustment, or crash, if you must.

It's hard to assess the potential scope of the fallout because so many local governments have become highly dependent on the income from land sales to finance their humongous debts from banks. As a result, a sharp downturn in real estate prices across the country could set off a chain reaction that could shake the foundation of the financial markets.

An adjustment is already happening in some smaller cities. In Wenzhou, once a boomtown in Zhejiang province, the property market has remained in the doldrums for many months, and rows on rows of apartment blocks in the "ghost towns" of Ordos in the Inner Mongolia autonomous region remain vacant.

To be sure, the demand for apartments in Beijing, Shanghai and other major cities has continued to outstrip supply. Many analysts attribute the strong demand to exceptionally low lending rates, the average rate of a 30-year mortgage taken out by a first-time homebuyer has slipped to below 5.5 percent a year, and an urge to buy now before prices go even higher.

The question in the minds of many economists at this point is what will it take to trigger a massive adjustment in property prices. In Ordos and some other smaller cities, the problem stemmed largely from overbuilding, but the prolonged slump in overseas demand for Chinese exports has already had a devastating impact on the property market in Wenzhou.

The brutality of such an adjustment was vividly demonstrated in the massive destruction of asset values in Hong Kong after the outbreak of the Asian financial crisis in 1997. But the Hong Kong banking system withstood the onslaught of a 60 percent decline in average property prices at least partly because of prudent risk management and timely regulatory measures introduced before the outbreak of the crisis.

As an open economy and with its currency pegged to the US dollar, Hong Kong is subject to global trends. What's more, Hong Kong has always adhered to the free-market principle that market forces must be allowed to run their course. The best it can do is to minimize the risks and introduce measures to lessen the social and economic pain before the economy can regain its balance. Tempering with market forces seldom works.

The author is a senior editor of China Daily. jamesleung@chinadaily.com.cn

(China Daily 11/02/2013 page5)