Identifier
Created
Classification
Origin
07BEIJING6859
2007-10-26 06:05:00
CONFIDENTIAL
Embassy Beijing
Cable title:  

RISING PRICES, RAPID GROWTH REMAIN ECONOMIC FOCUS

Tags:  ECON EFIN ETRD ELAB PGOV CH 
pdf how-to read a cable
VZCZCXRO9879
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #6859/01 2900605
ZNY CCCCC ZZH
O 260605Z OCT 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3091
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 006859 

SIPDIS

SIPDIS

STATE FOR EAP/CM AND EEB
STATE ALSO FOR INR/B
USDOC FOR 4420
TREASURY FOR OASIA/ISA - DOHNER/HAARSAGER/WINSHIP/CUSHMAN

NSC FOR TONG
STATE PASS USTR FOR STRATFORD
STATE PASS CEA
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON; SAN FRANCISCO
FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK

E.O. 12958: DECL: 10/26/2017
TAGS: ECON EFIN ETRD ELAB PGOV CH
SUBJECT: RISING PRICES, RAPID GROWTH REMAIN ECONOMIC FOCUS
DURING PARTY CONGRESS

REF: A. BEIJING 6286 AND PREVIOUS

B. SHANGHAI 679

C. SHANGHAI 553

D. BEIJING 6609

E. BEIJING 6777 AND PREVIOUS

F. BEIJING 3895

Classified By: CLASSIFIED BY MINISTER COUNSELOR FOR ECONOMIC AFFAIRS RO
BERT LUKE; REASON 1.4(B) AND (D)


Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 006859

SIPDIS

SIPDIS

STATE FOR EAP/CM AND EEB
STATE ALSO FOR INR/B
USDOC FOR 4420
TREASURY FOR OASIA/ISA - DOHNER/HAARSAGER/WINSHIP/CUSHMAN

NSC FOR TONG
STATE PASS USTR FOR STRATFORD
STATE PASS CEA
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON; SAN FRANCISCO
FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK

E.O. 12958: DECL: 10/26/2017
TAGS: ECON EFIN ETRD ELAB PGOV CH
SUBJECT: RISING PRICES, RAPID GROWTH REMAIN ECONOMIC FOCUS
DURING PARTY CONGRESS

REF: A. BEIJING 6286 AND PREVIOUS

B. SHANGHAI 679

C. SHANGHAI 553

D. BEIJING 6609

E. BEIJING 6777 AND PREVIOUS

F. BEIJING 3895

Classified By: CLASSIFIED BY MINISTER COUNSELOR FOR ECONOMIC AFFAIRS RO
BERT LUKE; REASON 1.4(B) AND (D)


Summary
--------------


1. (C) China's most recent macroeconomic indicators showed
inflation falling slightly, economic growth continuing to
surge and asset prices spiraling upwards as the 17th Party
Congress closed this week. Macroeconomic experts uniformly
stated that recent food price pressure on the Consumer Price
Index (CPI) appears to be abating, but that other
inflationary trends, especially the impact of the stock and
housing market bubbles on prices, potentially threaten the
economy in the medium-term. In the meantime, China
maintained its rapid pace of economic growth, with the GDP
increasing 11.5 percent in the 3rd Quarter (year-on-year).
Several contacts said they are interested to see what the
combined effect of Party Congress political maneuvering,
higher food prices and rapid growth will be on the rural
sector. End Summary.

Consumer Prices: Headed Back Down?
--------------


2. (U) Inflation was a chief economic concern during last
week's 17th Party Congress, with government officials taking
time on the sidelines of the Congress to reassure the public
that the recent surge in the Consumer Price Index (CPI) may
be subsiding. During separate press conferences, two Vice
Chairmen from the National Development Reform Commission
(NDRC) announced that consumer prices appear to be headed

back down to normal levels. The CPI increased by 6.5 percent
year-on-year in August -- the highest monthly rate in 11
years (Ref A) -- but NDRC Vice Chairman Chen Deming said on
October 16 that the CPI had increased only 4.1 percent
year-on-year through the first nine months of 2007, and core
inflation (which excludes food prices) increased by only 0.8
percent during the period. Vice Chairman Zhu Zhixin added on
October 18 that the CPI's rate of growth slowed in September,
hitting 6.2 percent year-on-year for the month. Zhu
reassured the public that the NDRC would take additional
steps if necessary, including tightening monetary policy or
curbing investment, in order to maintain consumer price
stability.


3. (C) Song Guoqing, a professor at Beijing University's
China Center for Economic Research, told Econoff on October
21 that he believes Zhu's announcement indicates that the 6.5
percent CPI growth in August was the peak of China's consumer
price inflation problem. The short-term food price inflation
problem is correcting itself, Song said, as farmers increase
pork production to meet demand. With lower food prices,
consumer prices will become less of a concern, he said.
China still will need to raise interest rates and control the
growth of loans, however, to bring under control long-term
inflationary pressures.


4. (C) Tang Min, Deputy Secretary General of the China
Development Research Foundation, and his wife, Zuo Xiaolei,
Chief Economist at Galaxy Securities, agreed that the price
spike brought on by the surging demand for agricultural
commodities (especially pork and eggs) may be nearly over,
telling Econoffs on October 23 that the government should not
be overly concerned in the short-term about intervening to
stabilize prices. The government should be concerned,
however, that its battle with rising prices is far from over,
Tang said, as China likely will experience rising prices in
the medium-term due to three primary factors:

--Rising wages due to continuing labor shortages will exert

BEIJING 00006859 002 OF 003


upward pressure on prices;

--As new local government leaders are installed, watch for
unwelcome signs of trying to debut too strongly -- by
spending more on vanity and white elephant projects, and by
taking costly steps to please people (e.g., cutting mass
transit prices, subsidies in the social sector) that in the
long run would be costly and even inflationary; and

--The continuing impact of the housing and stock market
bubbles on consumer prices, which potentially could be
significant as the bubble grows larger and growing public
confidence in asset investments affects consumer confidence,
thereby pushing up prices.

The Asset Bubble: About to Burst?
--------------


5. (C) Tang and Zuo said the third point -- the impact of the
asset bubbles on macroeconomic stability -- is a greater
concern than consumer price inflation. Tang said the Central
Government should consider pricking the stock bubble now or
it may well run a long course, hitting 10,000 or 15,000.
(Note: See Refs B and C for more information on the Shanghai
Stock Exchange's recent surge to 5,000 and then 6,000. End
Note.) If the market reaches such a high level, Tang said, a
crash would cause real economic damage. Tang therefore
advocates a market correction in the near-term, but he said
that since it is not in anyone's political interest to be the
bearer of bad news, he does not expect convincing action by
the government.


6. (C) The housing market presents similar challenges, and
the People's Bank of China (PBOC) and China Banking
Regulatory Commission (CBRC) jointly issued new regulations
in September in an attempt to curb the rise in housing prices
and cool speculation in the property market (Ref D).
Overheating in the housing market remains of particular
concern in the provinces, as local officials continue to
promote real estate projects in order to boost their
locality's GDP growth figures.

Strong 3rd Quarter as GDP Growth Remains High
--------------


7. (U) The natonal economy continued to surge in the 3rd
Qurter. National Bureau of Statistics (NBS) Sokesman Li
Xiachao characterized Q3 growth as"steady and fast,"
announcing on October 25 tat China's GDP increased 11.5
percent year-on-year during Q3 following 11.9 percent in Q2
and 11.1 percent in Q1 -- an overall increase of 11.5 percent
through the first nine months of the year.


8. (C) The 11.5 percent GDP growth figure was not surprising
to our contacts. Song predicted four days before their
official release that the 3rd Quarter statistics would show
continued rapid growth in the economy, with a likely increase
of 11 to 12 percent. Song said the Central Government is
under pressure to reduce domestic investment and reduce
exports in order to prevent overheating. He said that
eliminating tax rebates for exporters is the best way forward
as is continuing the gradual appreciation of the exchange
rate.


9. (C) Comment: The NBS press conference originally was
scheduled for October 23 but was delayed by two days, most
likely so as not to interfere with, or detract from, the
close of the 17th Party Congress. In addition, making the
announcement on a Thursday (rather than a Tuesday) likely
will mute press concerns about the economy as the media cycle
hits its nadir prior to the weekend. End Comment.

Story to Watch: Impact on Rural Stability
--------------


10. (C) Taken together, the 17th Party Congress, food price
increases and rapid economic growth combined to refocus some
attention on the rural economy and rural stability. Li
Guoxiang, Deputy Director at the China Academy of Social

BEIJING 00006859 003 OF 003


Sciences (CASS) Rural Development Institute, told Econoff on
October 23 that the Party Congress definitely struck the
right tone on rural issues with a continued focus by leaders
on the urban-rural income gap and the need for providing
social services in rural areas. Tang Min added that Hu
Jintao's promotion of "Scientific Development," which
emphasizes more balanced development, will help rural
residents who may have been left behind by China's "economic
growth at all costs" model. Several of our contacts,
including both Li and Tang, also said that some farmers
(especially pork producers) have benefited from food price
increases, thereby boosting the rural economy.


11. (C) CASS researcher Zhang Jun, however, offered a
dissenting view, complaining that many farmers have been hurt
by inflation in the countryside as they pay higher prices for
agricultural inputs. In addition, small farmers haven't
benefited from food price increases, Zhang said, as most of
those gains have been enjoyed by larger producers or the
middlemen who buy from farmers and sell to the markets.
Zhang also expressed concern about rapid economic growth and
the impact of 11-plus percent growth, as well as the
long-term goal of doubling the size of the economy, stating
that China does not have sufficient resources to continue to
growth at such a fast clip.
Randt