Russia’s View of China’s Macroeconomic Policy after the Financial Crisis
Svetlana P.Glinkina[1]
1.China culminated a long，successful reform and growth experience by growing exceptionally fast during 2003-2008.8.GDP rose by more than 10 percent on average during these 6 years fuelled by：
—the fruits of economic reforms that continued to make labor and capital more productive，including those undertaken in the context of WTO accession and earlier SOE reform；
—ample saving to finance China’s high investment，notably by enterprises and the government；
—improved macroeconomic management；and
—a very favorable global environment.
Thanks to these achievements China has surmounted the world financial crisis not only more rapidly than other countries did and with fewer losses.Since the end of 2009 the country has demonstrated high growth rates due to an efficient anti-crisis policy pursued by the state which implied a massive stimulus centered on infrastructure spending，combined with increases in transfers，consumer subsidies and tax cuts.But，despite all these facts，the problem of effectiveness of the economic growth pattern realized in the country emerged during the crisis as particularly acute.
To be fair，the government started to focus on imbalances caused by the capital-intensive，industry-led pattern of growth several years before the world crisis.These imbalances included：
· heavy reliance on investment and exports for economic growth with less focus on domestic demand，especially consumption；
· domination of industry，especially heavy industry，over services；
· rapid increase in demand for energy and other resources；
· widening income disparities，especially between urban and rural areas and between coastal and inland provinces；
· pronounced unevenness in access to basic public services across regions；
· a mixed record in the improvement of environmental quality.
2.The leadership of the country acknowledged that two key challenges stand out before China.The first is laying the basis for continued rapid development.Continued success will require further impulses to create major new sustainable sources of demand and supply.
The second key challenge is sustaining recent progress in moving towards a harmonious society.
Specific challenges include：growth quality improvement；efforts to create a less resource intensive and more environmentally-friendly form of growth；attempts to make growth more people-oriented，quality of life improvement；creating conditions for more employment generation and improvements in primary income distribution，quality of and access to public services，expanded social security and other means to reduce vulnerability；reducing external imbalances.
Meeting these challenges will require a range of reforms and policy adjustments.These reforms aim to achieve the following five inter-related objectives：
Ⅰ.Making further progress in rebalancing the economy
While China’s past growth model registered many successes，its imbalances and ultimate unsustainable nature have been long recognized.Speeding the shift from a model led by exports，investment and industry to one led more by domestic demand，consumption and services sectors has become more critical than ever.This is for some main reasons：First，in the course of the financial crisis，rebalancing of China’s economy became more urgent and important.With subdued near and medium term prospects for the post crisis global economy and，thus，for export demand-China will need to generate more domestic demand if it is to sustain relatively fast GDP growth.Second，issues of social and environmental sustainability are now prominent in the reform agenda，with rebalancing also being the key to progress in these areas.Rebalancing would support growth by creating new，permanent sources of domestic demand，including more consumption，more health and education spending，and new investment opportunities in growing sectors（notably services）and booming localities（e.g.inland provinces，cities）.To accomplish this transition，structural policy adjustments should be introduced.A set of measures should be implemented to help channel resources to sectors that should grow in the new setting，instead of to sectors that have traditionally been favored and done well.
A rebalanced economy would be more labor intensive and thus support the harmonious society agenda by creating more jobs for a given level of growth.This could，in turn，create the basis for improvements in primary income distribution.Such changes require a range of policy adjustments to address distortions，which have worked to overstimulate export，investment and industrial output and to overly discourage domestic demand，consumption，or services sectors.
Ⅱ.Enhancing efficiency gains in all sectors and spheres of activity
Greater efficiency can be supported in many ways.Reforms in the pricing of capital，energy，and other natural resources will lead to more efficient use of resources.Financial sector reform can improve the efficiency of capital.Further policies to support innovation can help.
China’s export enterprises move up the value chain.Opening up several monopoly sub-sectors in services and public utilities to competition and private sector participation can produce large efficiency gains not unlike those achieved by similar policies in the manufacturing sector a decade ago.Further rural reforms，especially in implementing recent policy reforms on land use rights，can lead to a more productive agricultural sector.An enhanced focus on human capital creation（health and education）will lead to a more productive workforce.
Ⅲ.Pursuing a more sustainable spatial transformation of economic activity and employment
While the core of the agenda is about moving to a more permanent and successful form of urbanization，it also includes a shift in economic activities，e.g.from coastal towards inland areas.Further urbanization is inevitable as China continues to develop.It can also be a positive source of sustained consumption growth（“urban people consume more than rural ones，and in particular spend more on services”）.More full urbanization stimulates the service sector-oriented domestic economy and creates demand for major new investments in productive activities，infrastructure，and housing.The resulting agglomeration effects can further raise productivity，especially if backed by investments to connect urban centers.However，urbanization needs to be pursued with due attention to social and environmental sustainability.The movement of people creates challenges for public service providers in both locations losing and gaining population（health，education，social services，local utilities and infrastructure）.But the benefits of more urbanization and mobility are so large that it is important to overcome these challenges.Recent measures to improve the portability of pension rights are very welcome in this regard.Urbanization can further be spurred and made more effective by a complementary reform of land markets，urban planning，and household registration（“hukou”）system.It also needs to be balanced by a substantial transformation of rural economy.Absolutely central for progress on this agenda is the reform of local government financing and inter-governmental fiscal relations.
Ⅳ.Further changes in the role of the state in the economy
This role has evolved significantly over the past 30 years and should continue to do so.In some sectors，this will entail expanding the role of the market，with the state shifting from the use of direct controls or dominant ownership stakes towards a greater focus on incentives，appropriate regulation，and other indirect means of governance.Such areas include the financial sector，the broader services sectors，some of to date more restricted utilities sectors，and land use rights.Conversely，in some other areas，the direct role of the state could be enhanced.These areas include the provision of health and education services and various dimensions of reducing vulnerability，including pensions，social assistance and climate change adaption.
Ⅴ.Taking account of China’s interaction with the rest of the world
This has three dimensions.First，as the global financial crisis will almost certainly have deep sustained effects on the growth rate and structure of world demand，China’s external environment will not return to “business as usual”.As a large country，which has greatly benefited from opening up and globalization，this will require non trivial adjustments in the sources and patterns of economic growth.Second，as China’s role in the global economy increases，including through increased outward investment，its development and policies will have increasing impacts on global markets and other countries which needs to be factored into policy making.These growing links will also have implications for planning physical infrastructure and promoting trade facilitation.Finally，working in concert with other countries，China will be involved in tackling a range of issues on global and regional public goods，including on the environment.
3.We have to stress that the program of China’s transition to a new growth pattern is all-embracing and well shaped，it in no way belittles the difficulties of emerging problems.We assume that，while attaining the goals set，the country’s leadership may face several serious challenges.Some of them are already obvious.
The first challenge is the perspective of lower economic growth rates of Chinese economy due to transition from a mainly extensive to an intensive growth pattern.Our estimates show that potencial GDP of China gradually declines to 7 percent in 2016-2020 as a result of the following factors：
· the contribution of total factor productivity is likely to diminish somewhat in the coming decade；
· with a mild easing of the ratio of investment to GDP from 2011 onwards because of modest rebalancing，grow of the capital stock slows materially in 2011-2020.
Some scholars expect overall employment in China to shrink somewhat in 2015-2020.To our view，surplus labor will be still sizeable，especially considering expected future technological change in agriculture and additional surplus labor in the cities（the official employment statistics suggest that over 40 percent of China’s employees are still employed in agriculture，where labor productivity is 1/6th of that in the rest of the economy）.We cannot but state that economic growth rates predetermine，to a large extent，job creation（extremely important for China as a densely populated country），which，in addition，proclaims the need to accelerate the urbanization process.Unemployment in rural areas is not iqual to urban unemployment from the point of view of its social consequences.So，certain social limits for a possible deceleration of economic growth rates in China in mid-term perspective do exist.
The second challenge implies a certain contradiction between the desire to expand domestic demand（as a factor of economic growth）and the danger of growing inflation resulting from the process.
We cannot but observe that along with market development a shortage of goods producing demand-driven inflation appears as a rare phenomenon.Therefore，we have to evaluate the scale of inflation not only by price growth indicators for goods and services，or by the dynamics of producer prices.Prices of real estate，land，raws need to be considered—everything that might be object of investing ample liquidity in order to retain its value.As known，ample liquidity and low interest rates during the last two years in China boosted property prices，especially in large cities，which affected housing prices and-with a time lag-prices of construction.Monetary policy has a key role to play in containing risks of asset price bubbles.
It would be useful to increase the tolerance for modest inflation to allow useful relative price adjustment.High inflation is distortive and not helpful.However，in rapidly growing countries like China，relative prices need to change as the economy is reformed and develops.In many emerging markets moderate inflation—of 4-5 percent—is not seen as a major problem.Constraining inflation to be very low may hinder the needed relative price changes.For instance，China needs to increase administrative prices for resources and utilities that are necessary to adjust the structure of the economy. And，higher prices for agricultural products and higher migrant wages can help boost rural incomes and reduce urban-rural inequality，thus helping to improve the primary income distribution.It would be unfortunate if such desirable developments were surpressed because of concerns about moderate inflation.
In addition to the mentioned above，we should note that while economic growth is being restored at the global level an inevitable increase in prices of raw and agricultural products is expected which may directly impact the inflation dynamics in PRC.
The third challenge.Low-paid workers，in particular second-generation migrant workers，represent a major potencial source of social unrest，which could be partly mitigated by adequate pay rises.There are certain signs that collective bargaining stipulated in China’s new Labour Law of 2008 will become more common now.The era of a declining proportion of GDP going to wages，which began more than 20 years ago，is probably coming to end now.[2]Higher wages are an important step towards a more consumer-driven economy.But as the result of shifting the pattern of growth the country’s competitive advantages based on low cost economy may weaken considerably，and it will pressure the search for new competitive advanteges.China as a “world fabric” will presumably have to transform herself into an “innovation giant”.This is，however，not feasible without developing high technologies，alternative energy sources and the newest materials.To reach the target not only huge financial resources will be needed（which the country，fortunately，possesses）and not only governmental organizational and managerial impulses，which start to be applied.World experience testifies that innovative development opportunities are，to a considerable degree，conditioned by successful social development.We cannot but acknowledge that China finds herself only on the initial stage of large-scale social reforms，whose absence presumably makes extensive economic growth stimulation much easier than that of mass innovative development.
The fourth challenge，which the Chinese leadership may face when practicing the new growth pattern，is connected with the situation in which mounting welfare in society will inevitably contribute to the emergence of population groups committed to new forms of political power arrangement.But “the market economy in formation now in PRC should for long retain the features of ‘coercion-led economy’（L.Erhard）.This is dictated by economic reasons，China’s drive at modernization demanding a high degree of resources centralization，as well as by the need for control over social and demographic situation，etc.”[3]“Coercion” may even increase with economic growth suggesting transition to intensive type of consumption by the 1.5 billion-strong population of the country，which，due to limited available resources of the Earth，in case of free market forces victory，may lead to serious problems.The objective necessity to retain elements of “hand control” in resolving certain issues may substantially destabilize the internal situation；this will，indeed，require the leadership’s Eastern wisdom to find an adequate balance between market and administrative governing mechanisms，between freedom and coercion，as well as a balance between differing interests of various groups of population.
The list of challenges may be enlarged.Some of them may stem from the differing speed of reforms and practical steps interrelated in principle in the strategy of transition to a new development pattern.For example，the target of reducing energy consumption might obviously not be achieved if the growth rate of urbanization and that of introducing energy saving technologies do not go in line.But evaluating the program as a whole，which is being implemented in China，we cannot but once again stress its complexity and scientific thoroughness，the strategemness of the thinking behind it.
The fifth challenge.The global imbalances and the tensions they create make the global context of China’s development full of uncertainties.A combination of large current account surpluses in some countries，including China，and large current account deficit in other countries，notably the US，poses financial and economic risks，including from possible tensions and contentious policy responses to them.
4.Russia-China trade and investment relations in the light of a new pattern of economic growth in China.
Russian imports from China for the first half of 2010 reached USD 11.8 billion，an increase of 59 percent y-o-y.Exports from Russia amounted to USD 13.9 billion，up 13.9 percent y-o-y.Russian trade with China for the first half of 2010 stood at USD 25.7 billion，a 51.6 percent increase y-o-y，and is expected to grow over the coming years as China imports increasing amounts of Russian raw materials.
Many people in Russia tend to think that in recent years Russian-Chinese economic relations have often adopted a pattern reminiscent of a colonial centre and periphery：China imports raw materials from Russia and exports manufactured products.One of the ways to alter this trend is a mutual exchange of investment between the bordering regions—the Russian Far East and China’s northern provinces.
In 2009 the program of bilateral cooperation between two countries until 2018 was adopted.It involves 205 mutual projects.Eight joint investment projects were approved by the Russian Ministry for Regional Development.Expenditure on them is expected to amount to about USD 12.6 billion.12 percent of this amount will be contributed directly from Russia’s federal budget and the rest of the total will be invested by a number of private developers.What is really important about these projects is the construction of one industrial and two recreation zones，a thermal power station，a bottled water and wood-processing plants，a railway bridge.Only one mutual project is linked with coal deposit development in the sub-polar Chukotka Peninsula.Thus，we can see real opportunities to introduce some changes into the structure of our economic cooperation.
[1] Svetlana Glinkina，Professor，Deputy Director，Institute of Economy，Russian Academy of Sciences.
[2] 14 provinces and regions have already raised minimum wages this year，with the highest by more than 20 percent.
[3] V.Y.Portyakov.Ekonomicheskaya reforma v Kitae（1979-1999）.M.，RAN，Institut Dalnego Vostoka，2002，s.26（V.Y.Portyakov.Economic Reform in China.RAS Institute of Far Eastern Studies，Moscow，2002，p.26）.