Lin Yifu: State must control capital

You have mentioned many times before that the Chinese economy has the potential to retain an 8 percent annual growth for 20 years. This potential stems from two aspects, namely comparative advantage and deepening reform. In what fields do you think that China needs to further its reform?

Lin: China indeed, as you mentioned, has a great late-mover's advantage. Yet tapping into the potential at a fast growth rate needs a harmonious society and continuous reforms.

Addressing the income gap, which has gradually widened, is a priority. The dual-track price system implemented at the beginning of the reform, helped to maintain a stable and rapid development, but sacrificed equal income distribution. At present, the over-concentration of finances in big banks, stock markets, telecommunications and transportation, has caused revenues and wealth to be redistributed to the rich people and big companies. This situation will cause depression and dissatisfaction among the public.

There is some distortion of governance in the economic transition that blocks our government's ability to guide the industrial technical upgrade in a market economy or to deal with the issues of environment protection or food safety. We need to remove this distortion through reform and enable the government do a good job.

Can we better tap into the potential if we further depend on the market?

Lin: A complete market mechanism is essential to exert the comparative advantage as it can fully reflect the relative price of productive factors. As all economic progress is a process of technological advancement, industrial upgrading and perfecting of infrastructure, the institutional progress too is a process, and the government plays an active role in this process.

We could not simply attribute China's economic development to the role of the market or that of the government. And we cannot overlook the importance of the government's part when stressing that of the market. Only when both parties carry out their respective tasks, can we realize China's revitalization.

In the past, people have lengthily discussed the necessity of the RMB appreciation. However, this topic has now suddenly changed its course to depreciation. In your opinion, what has caused this change of tune?

Lin: There are three reasons. First, the trade surplus has not been as large as before. Second, the dollar has been strong recently. And last, our export has become weak. Under these circumstances, the RMB appreciation should slow down and even navigate towards depreciation. If the exchange rate of a currency is determined by the market, it needs to be in constant fluctuation.

Thus far, the RMB exchange rate has not floating freely. What do you think is the reason for this?

Lin: First of all, there is not one country in the world where the exchange rate is fully determined by the market. It can only partly reflect the market situation. All central banks intervene in their domestic currency rates to some degree.

Second, at present, we need the state to control the currency exchange rate because all the developed economies are implementing easing monetary policies, triggering huge short-term and speculative liquidity on the market. If we loose control now, it will invite a large capital inflow and cause a fast RMB appreciation which will consequently weaken China's competitiveness in trade as well as create stock market and real estate bubbles. Later on then, the speculative capital will leave China and find another target. This kind of capital flow will cause great harm to any economy.

You have called for further breaking down the monopoly of state-owned enterprises. Some people have claimed that SOEs have squeezed out the private companies in many industries in recent years. Do you agree with this statement?

Lin: I think that our reform is progressing towards marketization. The private sector has played an increasingly important role in China's economy. The reason that some people are saying the SOEs squeezed out the private companies, is based on the fiscal and monetary policies, as well as the stimulus package that the government has issued since the first global financial crisis hit in 2008.

Big companies have become bigger by undertaking large infrastructure projects and they can indeed more easily obtain large bank loans than small and medium companies. Quite a few big companies are SOEs, so some people have drawn the aforementioned conclusion. Nevertheless, SOEs' benefiting from capital does not mean the direction of the reform has changed. We should see that the private sector's percentage in the overall national economy has kept increasing in recent years.