Friedman Says Inflation May Cripple China

American economist Milton Friedman warned China on Tuesday that soaring inflation could cripple the nation’s economy unless steps are taken to speed privatization of state-run industry.

The Nobel prize winner and champion of free markets also said China’s economy was being flooded with unchecked borrowings by state firms.

“There is nothing which will do more to undermine the great experiment on which China has embarked than a continued rise in the rate of inflation,” he told a conference of more than 100 scholars from China, the United States and Europe.

“The only solution is to find some way to limit effectively the credit that is granted (to state firms). The best way would be to privatize industries involved and force them to compete on the free market.”

Fuel for Inflation

China’s inflation surged to 19% in June, the worst since the Communists swept to power in 1949.

Chinese and Western economists say unchecked spending by state firms and unrestrained lending by government banks are fueling inflation.

China’s state council, or Cabinet, announced this month a freeze on prices for the rest of the year and pledged that inflation would fall in 1989.

Pu Shan, president of the Institute of World Economics and Politics, said China was working to ease inflationary pressure but Friedman’s formula of rapid and total industrial privatization was not now planned.

“No major reform can be completed overnight,” he said.

China is trying to make state-run firms more responsive to market demands by increasing managerial autonomy while maintaining public ownership.