PARTY CONGRESS ECONOMIC POLICY IMPACT SEEN AS

UNCLAS SECTION 01 OF 02 BEIJING 006286 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM STATE PASS USTR TREASURY FOR OASIA/DOHNER COMMERCE FOR 4420 E.O. 12958: N/A TAGS: ECON EFIN ETRD ELAB PGOV CH SUBJECT: PARTY CONGRESS ECONOMIC POLICY IMPACT SEEN AS LIMITED, BUT INFLATION REMAINS A POLITICAL CONCERN REF: A. BEIJING 5578 ¶B. BEIJING 5627 SUMMARY -------------- ¶1. (SBU) Several ECON contacts have told us that next month's Party Congress is unlikely to affect China's macroeconomic policies. One economic analyst opined that personnel changes at the Ministry of Finance could play a role in China's fiscal policy, but said the overall direction of reform would remain unchanged. All who we spoke to agreed, however, that inflation is no longer just an economic issue; it is increasingly becoming a political concern. They see recent government statements and actions on inflation as made with an eye towards the Party Congress. Investment bank research reports also support this view. END SUMMARY. NDRC on the Sidelines -------------- ¶2. (SBU) A research economist at the National Development Reform Commission (NDRC) said that China's top economic policymaking body has little involvement with preparations for the Party Congress (in contrast to more extensive involvement with the March National People's Congress, or NPC). The contact believes that personnel changes will not affect the direction of China's economic reforms and expects no significant economic policy changes to result from the Congress. It will be more interesting to watch the March 2008 session of the NPC -- the first NPC session after the Party's leaders have assumed their new positions, according to this contact. Economists Are Not "Reading the Tea Leaves" -------------- ¶3. (SBU) A locally-based private sector economist echoed the NDRC contact's position that the Party Congress would not affect economic policy, suggesting that economists have shown little interest in "reading the tea leaves" prior to the Party Congress because there is uniform agreement that economic policies will remain unchanged. The only possible exception is fiscal policy under new leadership at the Ministry of Finance. Economists are therefore interested in personnel changes at MOF and are watching to see if China will pursue a more aggressive fiscal policy in 2008. Inflation a Growing Political Concern -------------- ¶4. (SBU) Giving remarks at an Embassy-hosted conference on September 18, Wang Tongsan, Director of the Institute of Quantitative and Technical Economics at the Chinese Academy of Social Sciences, reiterated his position (Ref A) that inflation is a growing political concern for China's leadership, especially as the Party Congress approaches. Referring to the news that the Consumer Price Index (CPI) had increased 6.5 percent year-on-year in August, the most rapid pace in ten years, Wang said that there are two schools of thought within the government about the dangers of inflation. One view, held by the NDRC and the National Bureau of Statistics, is that the spike is limited to food price shocks and thus temporary. Wang said, however, that he is more inclined to agree with the People's Bank of China (PBOC), which has stated that recent inflationary trends could spark expectations of further price hikes and thus push up wage rates and core inflation items, leading to a more serious problem. ¶5. (SBU) A contact at the State Council's Development Research Center (DRC) added that nearly all of his time recently has been devoted to researching the food inflation problem, which has been the primary contributor to China's recent price spike. The DRC believes the problem will be short-lived, but the contact said the leadership is very concerned. Taking Steps to Counter Inflation -------------- ¶6. (U) With the Party Congress less than a month away, the government has taken more steps recently to bring inflation BEIJING 00006286 002 OF 002 under control. The Ministry of Commerce (MOFCOM) announced on September 18 that a recent survey indicated that the CPI would increase by more than four percent for the year in 2007 after three consecutive years at 1.5 percent. The survey also reported that prices are beginning to rise not only for food products but also for clothing. The general population is noticing the changes: the latest quarterly PBOC survey covering 50 cities found that 47.1 percent of respondents believe prices are too high, a sharp increase from the 29.5 percent figure from the previous quarter. ¶7. (U) The government has also frozen prices it controls for the remainder of the year, a move widely assumed to be aimed at promoting stability during the upcoming holidays (Mid-Autumn Festival and National Day) and Party Congress. Six ministries issued a statement that local governments are not allowed to raise prices without the NDRC's approval. PRIVATE ECONOMISTS SEE IT THE SAME WAY -------------- ¶8. (U) RBS Emerging Markets Strategist Ben Simpfendorfer suggested in a research note that the recent flurry of policy activity surrounding inflation exaggerates the immediate danger and is instead tilted towards placating public opinion ahead of the Party Congress. The price freezes, for example, apply to goods that are not important drivers of inflation. CLSA Managing Director Andy Rothman believes the government understands inflation is presently tied to temporary supply factors and does not tie the current trends to Party Congress outcomes. He expects the economic policy aspects of the Party Congress to focus on emphasizing previously announced "harmonious society" policies. Randt