V. V. ZHIGULEVA

Candidate of Economic Sciences Institute of the Far East of the Russian Academy of Sciences

China Keywords:, WTO, financial policy, price regulation

Since joining the World Trade Organization (WTO) in 2001, China seems to have lost the benefits of its previously closed economy from the outside world. Currently, a country that has become an important element of the global economy is not only experiencing a serious impact of world price dynamics on domestic prices (raw materials and food products), but also determines the price level for many types of industrial products. Over the past 10 years, China has experienced sharp fluctuations in domestic prices, with a general, albeit insignificant, increase in the consumer price index. However, the reasons and essence of price growth and financial policy, in general, are significantly different from the processes that took place in the period before the country's accession to the WTO. This article is devoted to the analysis of these differences.

Despite the fact that Russia has finally joined the WTO, the public continues to discuss the feasibility of this step. Advocates of membership in this organization argue that without participation in it, Russia will not be able to continue economic reforms, participate on an equal footing in international trade and receive the benefits associated with this participation. Their opponents believe that joining the WTO will cause irreparable damage to entire industries and deprive the government of the ability to make the necessary economic decisions. In this regard, we believe that the experience of the People's Republic of China in the field of pricing, which it has gained over the years of its stay in this organization, is of some interest.

Since joining the WTO, China has made significant progress. Not only has economic growth accelerated, the country has also been able to significantly increase exports of Chinese goods, and the inflow of foreign capital has increased. A number of social problems were also solved - reducing the level of poverty of the population, the gap between urban and rural areas.

Nevertheless, a number of negative phenomena have also emerged, including, first of all, the unilateral development of a number of export-oriented sectors of the economy, which have become the main recipient of foreign capital and modern technologies. And this is despite the fact that their products were not intended for domestic consumption.

Most of these factors, both positive and negative, are reflected in the dynamics of domestic prices. At the XVIII CPC Congress (November 2012), pricing issues were not given much attention. However, earlier in the" Government Report "at the spring session of the National People's Congress (NPC) in 2012, it was emphasized that" as a result of active fiscal policy, China has managed to maintain a balance between relatively rapid economic development, adjusting the economic structure and managing expected inflation."¹. This statement was made due to the fact that in 2010 - 2011 there was a significant increase in prices for China.

NATURE AND STAGES OF PRICING REFORM

By 2000, China as a whole had completed the pricing reform that began in 1978.Since then, prices for most goods have been determined in accordance with the ratio of supply and demand in the domestic market. For a number of years, inflation in China exceeded the 10% level, but the gradual and gradualistic nature of the reform of the pricing system, as well as the preservation of the state's levers of influence on prices, made it possible to avoid the emergence of hyperinflation and a decline in the standard of living of the population, as in many transition countries.

The deepening of the distribution system reform and the abandonment of the two-track system** in the second half of the 1990s became the main trends in the economy.-

* In the process of transformation of the transition economy, there are two main types of development: spasmodic-shock type and evolutionary-gradualistic type. The defining provisions of the" gradualist " strategy are stability of development, prevention of a decline in output, sustainable output, continuous flow of resources and investments necessary for structural changes, as well as creating conditions for social adaptation of the population in the process of economic transformation (editor's note).

** The long-term development strategy developed by Chinese economists and implemented by the Chinese leadership is based on the so-called "two-track approach". It is based on the principle of transition from a rigid central planned economy to a market system by gradually decentralizing the main economic decisions. A typical example of the "two-track approach" was the pricing reform, which provided for the opening of a free market without changing the volume of deliveries at lower planned prices; gradual changes in planned prices in order to reach the level of market prices (editor's note).

Table

Dynamics of China's price indices after WTO accession (2000-2011)

Source: Zhongguo jingji qianjing fenxi-2012 nian baogao (Jingji lanpishu) (Analysis of the Chinese Economy's Development Prospects in 2012 Reports of the symposium. Blue Book of Economics). Beijing, 2012, pp. 63, 65.

the main reasons for the change of inflationary trends to deflationary ones. The decline in prices primarily affected commodity prices. As for the consumer price index, its dynamics were significantly influenced by the growth of tariffs for housing and utilities services and transport, as well as the expansion of paid education.

The difference in the level of the two commodity and consumer price indices in this time interval was the maximum value for the entire reform period - 2 to 3 percentage points. The rapid rise in prices and their decline began to be seen as negative phenomena that hinder the harmonious development of the Chinese economy. It was recognized that a price increase of no more than 3% -5% per year is the most optimal for ensuring high growth rates. The implementation of an active financial policy in 1998-2000, involving significant public investment in infrastructure, can be considered as a basis for accelerating the growth of the Chinese economy in the 2000s.

Prior to joining the WTO, the Chinese press expressed concerns about the possible negative impact on the domestic market of lower world prices for imported goods. However, the 5-year grace period helped prevent such an impact. One of the main requirements for China's accession to the WTO was to make its internal pricing mechanism transparent. If we consider the dynamics of price indices, then for 10 years after 2000, we can identify three peaks of growth: 2003-2004, 2007-2008, 2010-2011 (see Table).

ДИНАМИКА ЦЕН - ОТРАЖЕНИЕ БЫСТРОГО ЭКОНОМИЧЕСКОГО РОСТА

С 2001 г. цены начали вновь расти, но их рост принял избирательный характер - периодически росли цены на продукты питания, под влиянием мирового рынка наблюдался рост внутренних цен на сырье, причем как импортное, так и направляемое на экспорт. Анализ месячного изменения индекса потребительских цен и цен на продовольствие выявил наличие после 2001 г. двух пиков роста цен: с октября 2003 по март 2005 гг. (максимальный рост приходился на сентябрь 2004 г. - более 5,6%) и новый рост цен с сентября 2006 г., закончившийся после начала мирового финансово-экономического кризиса в 2008 г. В обоих случаях рост цен, в первую очередь, был вызван ростом цен на продукты питания. Однако в 2006 - 2008 гг. цены росли в результате воздействия также и большего числа других факторов. С конца 2006 г. экономика Китая, как отмечают китайские ученые, "вступила в стадию перегрева"². Первоначально он был замечен в сфере промышленного производства, производства электроэнергии, розничном потребительском товарообороте и росте финансовых доходов. Что касается предложения денежной массы M1* и динамики цен, то по этим двум показателям ситуация изменялась крайне динамично: в первом квартале 2007 г. наблюдалась лишь тенденция к перегреву, а с июля 2007 г. - резкий перегрев. За первые 8 месяцев 2007 г. денежная масса M1, в среднем, росла на 23% в месяц, а с июля по декабрь 2007 г. совокупный индекс потребительских цен рос на 6 - 7%³, по сравнению с аналогичным периодом 2006 г.⁴

Рост цен в 2007 г. в Китае в основном был вызван ростом цен на материальные ресурсы, потребительские товары и продукты питания, ростом потребления населения, а также монетарным фактором. Если же брать одни только материальные ресурсы**, то со-

* Денежная масса M1 включает в себя все платежные средства из денежной массы M0, вместе со всеми деньгами, лежащими на расчётных счетах банков, так же как и деньги, которые содержатся в чеках путешественников. Денежная масса M0 - это общее количество всех физических счетов и платёжных средств плюс деньги в банковских хранилищах и всех депозитов, которые эти банки держат в резервных банках (прим. ред.).

** Материальные ресурсы - исходное сырье, материалы, комплектующие изделия, топливо, энергия (предметы труда), а также машины, оборудование и приборы (средства труда), необходимые для производства какой-либо продукции (прим. ред.).

вокупный индекс их цен в среднем увеличивался в течение года на 15 - 16% по отношению к аналогичному периоду 2006 г., что было обусловлено как ростом производства и потребления в стране материальных ресурсов, так и их экспорта.

As China's production capacity grew, the relative scarcity of its natural resources increased the Chinese economy's dependence on world markets, which, in the context of rising global prices for energy resources and raw materials, could not but affect the growth of domestic prices. The increase in world prices for imported goods directly affected the level of domestic prices. As for the prices of export goods, the pattern was much more complicated. In the first 8 months of 2007, steel production increased by 24.1%, steel consumption by 17.1%, and exports by 83.9%^.5

A significant excess of export rates over domestic production and consumption was caused by a rapid increase in world prices for raw materials and energy resources. As a result, the level of world prices for many export goods became significantly higher than the level of domestic Chinese prices, which stimulated an acceleration in the growth of their exports. As a result, there was a shortage of certain types of production resources (coal, coke, steel), which forced the Chinese government to impose export duties. But all this not only did not lead to a restriction of exports and a decrease in domestic prices, but also became an additional factor in their growth. The expansion of foreign investment in the material sector has led to an increase in export-oriented production capacities.

In 2008, prices for gasoline, cement and chemical fertilizers increased significantly. It should be noted that during the whole of 2007, wholesale selling prices for gasoline and petroleum products increased, while retail prices for gasoline were limited, amounting to only 1-5%. Cement production capacity grew at an accelerated pace during the entire reform period, despite the fact that the level of capacity utilization in this area was one of the highest. If the current pace of construction continues, China may face a shortage of cement in the coming years and will be forced to partially import it from abroad. Additionally, the price level is affected by the high monopolization of cement production (in the segment of super-limited enterprises that provide cement for the construction of large facilities).

Since 2006, a new wave of growth in world prices for chemical fertilizers has been gradually increasing. This problem is extremely relevant for China, as the country is one of the world's largest consumers of fertilizers. Despite the growth of domestic production of these products, China has become one of the world's largest importers. Rising fertilizer prices can lead not only to higher food prices, but also become one of the factors contributing to the increase in social tension.

MAIN FACTORS OF PRICE GROWTH

As in 2004-2005, the main factor that caused the increase in consumer prices was a rather sharp increase in food prices. In 2007, the main driver of price growth was an increase in prices not for grain (6.1%), but for pork (31.7%) and eggs (22.9%).⁶. The increase in pork prices has also become one of the factors driving up the prices of public catering. However, the highest increase in prices was recorded for fat pork, the main consumers of which are the rural population and poor urban residents. Thus, the actual increase in food prices for the most vulnerable segments of the Chinese population is significantly higher than the official price increase and, consequently, the increase in inflation. Among the main reasons for the increase in pork prices, Chinese experts point to a reduction in the number of livestock due to a decrease in demand for meat in 2005 - 2006, as well as due to epidemics among animals.

As food prices accelerate, their share in inflation increases to 80% -90%. During the period of decreasing inflation rates (2005-2006), the ratio of the impact of rising prices on food and other factors is equalized. Rising gasoline prices further increase the cost of agricultural production.

The growth of consumer and commodity price indices was significantly affected by the monetary policy of the Chinese government, which was manifested in the formation of an excess mass of liquidity in the country, a rapid increase in the positive balance of foreign trade turnover, and the polarization of the structure of bank deposits.

Since 2002, the growth of the money supply M1 and M2* has completed the full cycle. Since the beginning of 2005, the decline phase has begun, and the growth of the money supply has slowed down somewhat.

Subsequently, there were relative changes in the growth rate of these two indicators. The growth rate of the M1 money supply accelerated and by the end of November 2006 had overtaken the M2 money supply in terms of growth rates. In the first 10 months of 2007, the M1 money supply increased by 22.1%. As noted above, the money supply M1 is the sum of cash in circulation and current deposits of enterprises in banks. The money supply M2 exceeds M1 for term deposits of enterprises and savings in banks of the population. The M1 turnover rate is significantly lower

* The money supply M2 is the amount of cash in circulation (outside banks) and the balance of funds in national currency on the accounts of non-financial organizations and individuals who are residents of a given country (editor's note).

above M2. Relative changes in the growth rate of the money supply M1 and M2 reflect price fluctuations.

Since the growth of the money supply in China lags significantly behind the growth rate of inflation, we can conclude that the predominance in China is not" monetary inflation", but "cost inflation". In China, the "pro-inflationary factor number two", which determines the dependence of inflation on wage growth, also works poorly. Inflation is not only and not so much determined by the growth rate of household incomes as by how these incomes are used. During almost the entire reform period, a certain part of the income of the Chinese population was placed on deposit accounts. However, progress in the reform of the pension system, the expansion of paid services in medicine and education, the reform of the housing system, the rapid development of the stock market, as well as changes in consumer psychology have largely changed the nature of consumption of the population, which could not but become an additional factor in price growth.

NEW TRENDS IN PRICE DYNAMICS AFTER 2008

The beginning of the global financial and economic crisis in 2008 changed the trend towards "overheating" of the economy and rising prices. Prices declined in the fourth quarter of 2008 and I-II quarters of 2009, but since May, as anti-inflationary measures expanded, they began to gradually increase, although the total index for investment goods decreased by 2.4 percentage points in 2009. The Chinese government, having established a focus on domestic consumption as the main way to overcome the crisis, actually used the set of measures developed in 1998-2000 to expand construction in the field of infrastructure. These measures could not fail to increase the demand for investment goods, which grew by 3.6% in 2010.The highest price growth (9.6%) occurred in raw materials and fuel. This trend was mainly caused by a significant increase in global prices for these commodities, as well as the completion of most of the contracts for the purchase of oil and other imported raw materials that China managed to conclude at the end of 2008 during a period of temporary decline in world prices.

The growth of price indices in 2010 created the basis for strengthening this trend in 2011 (see chart). The largest increase in prices occurred for food products - consumer prices increased by 11.8%, and purchase prices-by 6.5% ⁷. The increase in food prices was mainly caused by higher prices for pork and vegetables. In the spring and summer, the time of maximum supply of agricultural products, there was a maximum increase in prices. For 7 months of 2011, food prices increased by 14.8% (in particular, for cereals-12.8%, meat-33.6%, eggs-19.7%). The increase in food prices mainly affected the lower-middle-income population, which accounts for about 40 % of the country's total population. The Chinese leadership has taken a number of measures to limit price growth. As a result, food prices increased by 9.1% in 2011, while the consumer price index increased by only 4.1% ^.8

During China's 10-year WTO membership, prices for agricultural products have increased three times

Chart. Dynamics of the consumer price index in 2011 (compared to 2010).

Source: People's Daily, 22.02.2012.

especially fast: in 2004-2005 - 8.5%, in 2007-2008-7.7-20.3%, in 2011-11.8%. Among the reasons can be noted a decrease in the number of pigs due to the periodically occurring epidemic, as well as a change in the dynamics of prices on the world market. Another reason is the increase in grain exports to such an extent that it even caused a supply restriction in the domestic market.

A special feature of the pricing policy in 2012 was the implementation of the reform of prices for oil, natural gas and water, as well as electricity tariffs. The main focus was on controlling companies that produce and transport electricity. It is expected that local price committees will provide calculations of differentiated electricity prices for individual consumers by mid-2013, and the price department of the Reform and Development Committee will develop tariffs for provinces by the end of this year. In the first half of 2012, the consumer price index increased by 3.3%, including 6.9% for food products. Factory selling prices decreased by 0.6%, which was largely due to a decline in business activity. If we consider the change in price indices for individual months of 2012, there was a tendency to reduce their growth rates. For example, in January and February, the growth of the consumer price index (CPI) exceeded 4%, and in May-June it was only 3% and 2.2%, respectively.⁹

In addition to rising prices for food and certain types of raw materials, China has faced increased tariffs and prices for certain social goods. For 10 years, work has been carried out to regulate the prices of medicines, medical supplies, and tariffs for medical services, and a certain balance has been found between market prices and subsidies to the population. Production of a number of agricultural products (fertilizers, plastic film) continues to be subsidized by the state.

FEATURES OF THE PRICING POLICY OF THE CHINESE LEADERSHIP

Summing up the dynamics of prices in China after joining the WTO, it can be noted that the more the country was involved in world trade, the greater the impact this had on the level of domestic prices. On the one hand, world prices for Chinese export goods often exceeded the domestic Chinese level, which often led to a reduction in supply in the domestic market and an increase in prices (for example, for coke or grain). The situation can be compared to the impact of rising world oil prices and domestic Russian prices. Another aspect of the growth of exports and the increase in the surplus was the growth of the country's money supply (the inflow of large amounts of money in yuan to the domestic market when foreign exchange earnings were transferred), which inevitably led to increased inflation.

However, it should be noted that China is the only country in the world that falls out of the well-known scheme of the ratio of economic growth and inflation rates: "rapid growth - high inflation", i.e., the faster the economy grows, the greater the need for raw materials, materials, and labor, and, accordingly, you need to pay more for all this. China is growing its economic power one and a half times faster than Russia, while having half the inflation rate. To a large extent, this was achieved due to the Chinese administration retaining a sufficient number of levers (market and administrative) to influence pricing.

Back in December 1997, the "Law of the People's Republic of China on Prices" was adopted, which defined the policy of the Chinese leadership in the field of price regulation, which continues to operate at the present time. The law established the use of three types of prices in China: market prices, state-regulated prices, and state-set prices. The State regulates and sets prices for goods and services that are considered essential for the development of the national economy and the standard of living of the population; for rare goods or limited resources; for goods and services that fall under the natural monopolies of the state.

The Law on Prices provides the State with opportunities to resort to price regulation in the event of "urgent need" or "extraordinary circumstances". In relation to goods sold at market prices, the central government has the right to create reserve funds that can be used to subsidize producers and maintain a certain price level in the event of overproduction in the domestic market, changes in consumer behavior and demand, or an increase in cheap imports.

The State can set a price corridor if purchase prices for cereals or other important agricultural products fall, and apply extraordinary measures if prices for basic goods and services rise significantly. Such extraordinary measures may differentially include limiting the level of prices at production, wholesale and retail prices, reducing the rate of profit, and setting price surcharges. If the aggregate index of market prices for goods and services fluctuates significantly or other "extraordinary circumstances" arise, the State Council of the People's Republic of China has the right to take appropriate measures at the national or local level.

Among the goods and services that the state sets prices for, we should mention factory wholesale prices for natural gas, oil, and trucks,

civil aircraft and various types of steel and rolled steel used for railways; prices for government orders in the defense industry; factory prices for goods made of gold, silver and alloys from them; factory, wholesale and retail prices for all pharmaceutical products.

Types and authorities of price controls vary depending on the type of goods and services. Prices can be set and regulated by price committees at the central or local levels, as well as by ministries of relevant industries. For example, in many cases, provincial governments are responsible for the price level of rice and grain, and often control the prices of important vegetable crops.

The Law on Prices clearly identifies eight prohibited activities that are defined as "unfair":

- collusion in determining the price level;

- dumping prices;

- spreading rumors about future price increases;

- expansion of economic activity through the use of false prices;

- discrimination against individual economic entities;

- price manipulation due to incorrect declaration of goods;

- illegal speculation.

15 years have passed since the adoption of the" Law of the People's Republic of China on Prices". All this time, the Chinese periodical press published explanations of the provisions of the law, and specialized literature (Zhongguo Wujia magazine) provided options for revising individual articles and bringing the provisions of the law closer to the new economic conditions. The Law is supplemented by a number of legislative acts dealing with violations of its provisions when setting prices and trading in counterfeit goods. China's accession to the WTO and the removal of import tariff barriers at the end of 2006 required the development of an Anti-dumping Code and a law on the abolition of export subsidies.

After 2000, a policy of combining market and administrative levers of influence on prices was implemented. Although in domestic retail and wholesale trade, market prices average 95-97%, but often the specifics of the Chinese economy involve the use of administrative levers within the framework of the provisions of the"Law on Prices".

The country has a large number of medium-sized enterprises (usually cement, glass and flour mills). Local authorities often prevent the import of non-local goods into the counties, up to the introduction of a kind of economic blockade. At the same time, the possibility of purchasing goods of non-local production is restricted by any means, and aggressive advertising of local goods and manufacturers is conducted. For this purpose, the following measures are implemented, among other things::

- organization of special checkpoints on highways, ports, entrances to towns and cities in order to restrict the import of non-local goods or the export of local goods;

- imposing additional taxes and fees on goods of non-local production, works or services performed by non-local companies in order to set prices that are unprofitable for sellers;

- introducing various technical and sanitary requirements for local and non-local goods, conducting constant inspections of the latter, and practicing unjustified bans on the sale of these goods;

- applying excessive requirements when registering firms that sell non-local goods or use non-local labor;

- creating more favorable conditions for the activities of local enterprises and companies through the use of administrative methods.

* * *

The dynamics of price growth in China in recent years has shown that the Chinese leadership has not yet accumulated sufficient experience in regulating prices in the new conditions. The increased involvement of the country in world trade has had a significant impact on the level of domestic prices. Global prices for Chinese exports, often exceeding the domestic Chinese level, often led to a reduction in domestic supply and an increase in prices (for example, for coke or grain). The current situation in China can be compared with the impact of rising world oil prices on domestic Russian prices.

¹ http://russian.china.org.cn/exclusive/txt/2012-03/14/content_24896428.htm

^{Chen Lei, Liang Yunfang, Qiu Shene.} 2 Zhongguo jingji qianjing fenxi-2008 nian baogao (Jingji lanpishu) (Analysis of the prospects for the development of the Chinese economy. Reports of the symposium). The Blue Book of Economics. Beijing, 2007, p. 79.

³ Ibid., pp. 8-82.

⁴ In Chinese statistics, two types of monthly price indices are usually calculated: the change in prices relative to the same period of the previous year and the average increase in prices relative to the beginning of the year.

^{Chen Kexin, Chen Congqun.} 5 (Analysis of price dynamics in 2007 for production materials and prospects for 2008) ... Blue Book on Economics.., pp. 203, 206, 209.

⁶ People's Daily, 29.02.2008.

⁷ Ibid., 22.02.2012.

⁸ Zhongguo jingji qianjing fenxi-2012 nian baogao (Jingji lanpishu )( Analysis of the prospects for the development of the Chinese economy in 2012 Reports of the symposium). The Blue Book of Economics. Beijing, 2012, p. 53.

⁹ http://www.gov.stats.cn//2012.07.13

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