Time for China to remove distortions in resources allocation

SINGAPORE - China is at a development stage where it is necessary to remove the distortions and bottlenecks in the mechanism for resources allocation, former World Bank chief economist Justin Yifu Lin said on Wednesday.

"It's time to remove these kinds of distortions and the Chinese leadership certainly understand this issue very well," he told the inaugural Singapore Management University China Forum.

Lin, who is currently the honorary dean and professor at the National School of Development of Peking University, also said China is "ready" to pursue reforms to allow the market to play a fundamental role in the allocation of resources in its economy.

The reason is that China is already at a development stage where it is no longer short of capital and, instead, has an advantage in capital-intensive industries such as automobile and equipment manufacturing, he said.

China was successful in gradually moving from planned economy to a market economy, but it has also adopted a dual-track approach over the years, allowing China to "cross the river by groping for the stones."

Lin said this allowed China to sidestep the trap where nearly all the economic sectors collapse when all the distortions are removed simultaneously and all of a sudden.

As for the fundamental drivers of growth, Lin highlighted constant technological innovation and industrial upgrading for any economy. China was able to utilize its advantage of backwardness, he said.

The world's largest developing economy started with labor intensive industries where it had a comparative advantage after it opened up to foreign investment.

But now it is already at a stage where it is starting to have an advantage in the capital-intensive sectors, Lin said.

It means that the distortion in resources allocation mechanism that has the households and the small firms effectively subsidizing the operations of the big firms seems increasingly absurd and even causes social concerns.

Lin said that the distortions and bottlenecks are a legacy from the era of planned economy. The big firms, many of them state- owned, have access to cheap credit, whereas it is difficult for the small firms and the household to get access to the credit.

China has already scrapped the cap on lending rates and the next step would be to remove the limit on savings rates, thereby achieving an interest rate determined by the market, he said.

China needs more smaller financial institutions that operate in the provincial or local markets, Lin said.

Meanwhile, Lin said that he remains confident of China's growth for the coming years.