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Lin Urges Caution in Encouraging "Heavy Industrialization"


     Justin Lin of Peking University''s China Center for Economic Research believes that China must be cautious in its move toward heavy industry.  In the past two years, China has sped up development of heavy industry, but this development is not one brought by China''s economic development or natural production upgrades.  The current trend of "heavy industrialization" is not in line with China''s economic and social development.  The labor surplus should promote the development of labor intensive industries, not capital intensive industries.  However, the fact remains that heavy industry, not part of China''s relative advantage, is being supported by state banks.  In the meantime, many competitive, labor intensive, small and medium businesses are unable to obtain loans from state banks.

     China''s current reality is an abundance of cheap labor.  Capital is expensive and at this stage, to develop capital intensive indstry outside of China''s relative advantage will result in an increase in non-performing loans.  A possible solution to the problem of small and medium businesses being ignored by the four state-owned banks is for smaller banks to open their doors to those businesses in need.

     In strategic development, the role of the government is not to choose its role, but to build a market environtment.  In order to develop according to relative advantage, if the government is willing to support non-competitive industries, those industries will have to be protected administratively.  This will result in price adjustment and state protection, which will have a definite effect on competitiveness.  Similarly, it will be difficult for those industries that do not receive adequate capital to become competitive, thus resulting in a loss of competitiveness for the economy as a whole.