The authorities adapted the Chinese principles of economic management

The Russian model of economic management in recent years has increasingly taken into account the Chinese experience, Economic Development Minister Maxim Reshetnikov told Vedomosti during Prime Minister Mikhail Mishustin’s visit to China. He named two principles characteristic of the PRC system, which began to be applied in Russia.

First, according to the minister, the planning horizons have been significantly lengthened. Now the period up to 2030 is considered rather as a medium-term one, plans for solving strategic issues are signed up to 2040-2045. “It is clear that in the conditions of the current turbulence and possible deviations from the expected trends, it is quite difficult to plan some issues for a 15-20 year perspective. But the development of technologies, the construction of infrastructure, the reorientation to the East are, without a doubt, stable trends, and here we focus on long-term periods,” Reshetnikov explained.

The second area, to which the authorities began to pay much more attention, is demand monitoring. When a decline in consumption is recorded, both among the population and in the corporate sector, the authorities quickly respond and compensate for this at the expense of the budget, Reshetnikov recalled. Including, according to the minister, the borrowing policy has become much more loyal. “In recent years, we have become much less afraid to borrow and have begun to use the budget deficit as a tool for economic development much more,” the minister explained. But, according to him, it is very important to monitor the effectiveness of investments, because with intensive budget spending, there are fewer projects that create high added value.

“On the one hand, we see all the results of China and this causes deep respect. On the other hand, it is important not to reinvest in infrastructure, but also to invest in technology development. Often these are high-risk projects that need government funding,” he explained. Of course, it cannot be said that we are borrowing some elements from the Chinese model – it is simply impossible to adopt it purely mechanically, Reshetnikov summed up: “We have our own institutions, our own practice, principles. But we carefully analyze and take into account the experience of our colleagues.”

The authorities have indeed begun to apply much more approaches to managing the economy, which are characteristic of the Chinese model, as well, a source close to the Kremlin confirmed. We can say that last year the transition to new principles was completed, he noted.

According to him, the main change is the achievement of a qualitatively different level of coordination between budgetary and monetary policy. The government and the Central Bank, he said, are actually now forming their plans based on a common goal: a sustainable increase in GDP, while maintaining financial stability. At the same time, it is important to ensure precisely long-term growth, since over a short horizon it is quite simple to disperse the economy through its saturation with liquidity, the interlocutor emphasized.

Formally, it was assumed earlier that the final result should be general, he recalled. But in practice, decisions within the framework of budgetary and monetary policy were often made in isolation, based on local benchmarks of institutions, such as the level of public debt or inflation.

“This does not mean that someone began to command someone. [Такая политика] does not cancel the institutions’ own goals, such as inflation,” a source close to the Kremlin emphasized. But at the same time, now inflation targeting has reached a certain maturity, and, for example, in the government, when making decisions last year, they were guided by the forecast range for inflation formed by the Central Bank (for 2023 it was set at the level of 5-7%. – Vedomosti) . Proceeding from this, plans were made, for example, for the indexation of tariffs, he recalled.

It has now become clear that price growth has slowed down even more significantly than expected, the source noted (the Central Bank also revised inflation estimates at the end of April and now predicts a range of 4.5-6.5%. – Vedomosti). In general, a strong deviation of inflation from the forecast indicators, and in both directions, will be considered as a miscalculation of the monetary policy. This would mean that either the reaction to the price crackdown was too slow, or the growth potential of the economy was unrealized due to low demand.

Another source close to the government confirmed that the institutions have become more closely coordinated with each other. The restructuring of the interaction system began in 2020, he noted: “At first, at closed government meetings, the reaction, for example, [председателя ЦБ Эльвиры] Nabiullina to discuss the policy of the Central Bank was rather negative, but now a consensus has been reached on the whole. Last year, it quickly became clear to everyone that the budget would break if the rate remained at 20% for a long time.” At the same time, out of fear of rising prices, decisions were made last year on budget consolidation from 2023, Vedomosti’s interlocutor recalled.

Strengthening of coordination, according to him, became noticeable even with a superficial examination: at least the participation of the chairman of the Central Bank or her deputies in government meetings on economic issues has become a rule. Representatives of the Ministry of Finance and the Ministry of Economics began to participate in meetings of the Board of Directors of the Central Bank, although not as voting members. In addition, the president regularly holds meetings with members of the government on economic issues, in which the chairman of the Central Bank traditionally participates.

The representative of the Ministry of Finance forwarded the questions of Vedomosti to the Ministry of Economics. The press service of the Central Bank did not respond to a request.

The Chinese model is the best example of interaction between monetary and fiscal authorities to achieve macroeconomic goals, says economist Viktor Tunev. Whatever the budget deficit, foreign trade conditions or domestic covid restrictions, the yuan remains relatively stable, while it is not fixed, but slowly moves behind a basket of other currencies, he noted. At the same time, interest rates along the entire curve do not change for a long period relative to the NBK’s goals and do not create additional risks, the expert added.

But we are still very far from the Chinese model, says Tunev. The key difference is in the financial sector: it is the regulation of capital flows, the management of the exchange rate and interest rates over the long term. If signs of tacit management of the ruble exchange rate could be found in the second half of 2022, then we have practically no other elements, the economist concluded.

From the point of view of parallels with the Chinese model, so far we can only say that the Russian authorities are approaching a true understanding of the “sovereignty” of the national currency, Daniil Grigoriev, an expert at the New Deal economists association, believes. It is not so much about the formation of a ruble zone in the EAEU or payment for gas in Russian currency, he noted. In recent years, and especially in 2022, the state has come closer to treating rubles as a scarce resource, he explained. We can agree with Reshetnikov on this, the expert noted.

While this is happening in the format of emergency measures, he added. Judging by the public rhetoric, the government treats this more as an unreliable cause that is better not to build a system: hence the desire to return to the “normal order of things” as soon as possible – to find other buyers in the world market, not to seriously rely on domestic demand, remove all “excessive” restrictions on capital outflows for residents as soon as possible. Nevertheless, the need for a less conservative policy against the backdrop of external economic challenges may lead to a gradual weakening of the cult of supposedly responsible budget financing, the economist stressed.

China is characterized by a lot of market and competition, on the one hand, and regulation and the state, on the other hand, recalled Dmitry Kulikov, Director of the ACRA Sovereign and Regional Ratings Group. The economy is very large, so it can exist in parallel in different sectors and at different levels, the economist continued. The regions play an exceptionally important role in Chinese economic policy, Kulikov stressed. Although the figures from the five-year plans are visible, there is a lot of freedom in their implementation at the level of regional governments, he noted.

Fiscal policy is characterized by poor manageability of the debt burden, which is partly the result of a fairly high decentralization in decision-making, says Kulikov. There is a well-known history of so-called LGFVs, special financial companies of regional governments that use an implicit state guarantee to raise funds from the market, he continued. By creating large off-balance sheet debt burdens for the regions, they are perceived by central authorities as a problem for the country’s financial stability, but at the same time have traditionally been assessed as a viable solution in meeting infrastructure and growth goals, Kulikov added. In Russia, judging by the public debt, centralization is now taking place rather than decentralization.