China's economy has the potential to grow 8 percent annually over the next 20 years should the nation reduce support for state companies and unshackle banks, according to Lin Yifu, a former World Bank chief economist.
"We can be quite optimistic," Lin, who now teaches at Peking University in Beijing, said at a New York Stock Exchange conference on China's economy Monday. To harness its potential, the country needs to widen income distribution and cap corruption, he said.
The Chinese economy is showing signs of recovering from a slowdown that spanned the seven quarters to Sept. 30, with data from manufacturing to retail sales and industrial production indicating expansion over the past two months. The world's second-largest economy is poised to grow 8.1 percent this year, from 7.7 percent in 2012, according to the median estimates of 49 economists surveyed by Bloomberg last month.
Lin predicted China's gross domestic product will rise as much as 8.5 percent this year, driven by investment in infrastructure, upgrades of equipment and machinery, and personal consumption. Lin was chief economist at the Washington-based World Bank between 2008 and 2012.
China can sustain such a fast pace of growth in the long term by using technologies created in developed economies at relatively low cost, Lin said. China is following 13 other countries that have maintained an expansion rate of more than 7 percent annually for 25 years, including Singapore and South Korea, he said.
Chinese banks need to be given more freedom to set interest rates, according to Lin. The current economic model sees lenders channeling cheap capital to companies controlled by the government and "elites, sowing the ground for corruption," he said.
Asia's largest economy, China was ranked 75th in Berlin- based Transparency's International's 2011 Corruption Perceptions Index, behind Brazil and ahead of Russia and India.
China underwent a once-a-decade leadership transition in November, with Xi Jinping named general secretary of the ruling Communist Party. Xi, set to succeed Hu Jintao as president in March, said last month that China shouldn't delay economic restructuring or shy away from unfavorable factors at home and abroad.
Qin Xiao, former chairman of investment company China Merchants Group Ltd., echoed Lin's call for economic reform. Qin, chairman of the Boyuan Foundation, a Hong Kong non- profit group, proposed a reform plan for the next three years at the conference that includes opening up China's capital markets, cuts to tax rates and allowing local governments to issue debt.
Changes to Chinese economic policy will be gradual and the nation, the world's largest exporter, will avoid "shock therapy," Lin said. Reforms made over time should achieve their goals, he said.