OCTOBER PRICE SURGE ATTRACTS ATTENTION IN BEIJING AND

UNCLAS SECTION 01 OF 02 BEIJING 007233 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN PGOV ETRD EINV CH SUBJECT: OCTOBER PRICE SURGE ATTRACTS ATTENTION IN BEIJING AND PROVINCES (C-AL7-02027) REF: BEIJING 6859 AND PREVIOUS SUMMARY -------------- ¶1. (SBU) Consumer Price Index (CPI) inflation rose to 6.5 percent year-on-year in October, tying with August's 11-year high, further exacerbating a major leadership concern (reftels). Food prices remain the primary contributor to price increases, as core inflation was low at 1.1 percent. Officials in both Beijing and the provinces sought to reassure consumers that the government is taking necessary measures to control prices, particularly in the wake of a stampede at a supermarket in Chongqing. The media prominently covered Premier Wen Jiabao's visit to a wholesale market, and officials in Henan Province told Econoff that local policies are focusing on stabilizing prices for pork and edible oils. Wen also warned on November 20 that structural inflation pressure could develop into across-the-board inflation. Economic analysts are divided about what will happen next in China's inflation story. Many investment bankers continue to assess the problem as a short-term phenomenon limited to food prices, but others characterize inflation as a broader issue. Meanwhile, property price increases in October also attracted attention from analysts and government officials. END SUMMARY OCTOBER FIGURES SHOW PRICE SPIKE CONTINUING -------------- ¶2. (U) CPI inflation hit 6.5 percent year-on-year in October following a slight dip to 6.2 percent in September. The 6.5 percent mark tied an 11-year high first set in August. Food accounted for 89 percent of the overall CPI increase, and non-food CPI increased only 1.1 percent. Pork prices rose by 55 percent in October as China continues to struggle from a short-term pork supply shock. Vegetable prices rose by 29.9 percent and eggs by 14.3 percent. ¶3. (U) Price increases grabbed front page headlines in early November after a sale on cooking oil in a Chongqing Carrefour led to a stampede that killed three people and injured 31. Chinese and Western media reported that there also were 15 injuries in a similar incident at a Tesco market in Shanghai in October. (Note: Stampedes at supermarkets also have occurred in the past when inflation was not as high. End Note.) CONCERN IN BEIJING AND PROVINCES ABOUT RISING PRICES -------------- -------------- ¶4. (U) The media prominently covered Premier Wen Jiabao's recent visit to a wholesale market where he reassured low-income families that the government would adopt necessary measures to combat inflation. Wen has consistently expressed concern about rising consumer prices since May (reftels),underlining the Central Government's concerns about the link between inflation and social stability. ¶5. (SBU) In Central China's Henan Province, an official from the Provincial Development and Reform Commission said that inflation is not yet a serious economic problem, but he agreed that inflation is a social stability concern and local authorities therefore cannot afford to ignore it. Other Henan officials added that there is growing concern about the rising price of edible oils. ¶6. (SBU) An economic policymaker in Henan's Kaifeng Municipality said the local government would continue to mitigate the food inflation problem through a two-track rural-urban subsidy solution by: (1) providing insurance to farmers to encourage them to raise pigs and (2) giving RMB 15 (USD 2) per month to low-income families in urban areas to offset rising prices. The official said subsidies would continue until at least the end of the year. PREMIER SAYS THERE'S MORE REASON TO BE CONCERNED -------------- --- ¶7. (SBU) At the ASEAN Summit in Singapore on November 20, Premier Wen warned that sector specific inflation pressure could develop into across-the-board inflation, signaling the government's mounting concern that food inflation could spill over into non-food inflation. As a result, the upcoming Central Economic Work Conference -- the Central Government's annual meeting on economic issues -- reportedly will focus on inflation and possible monetary and fiscal policy responses. INVESTMENT BANKS DIVIDED ON WHAT COMES NEXT -------------- BEIJING 00007233 002 OF 002 ¶8. (U) Investment bank reports offered a wide range of views on China's inflation problem. CLSA Asia-Pacific Markets, for example, offered the conventional view that inflation is a short-term food price problem and not a reason for the government or public to panic. Similarly, a recent report by JP Morgan focused on the low rate of core inflation at 1.1 percent year-on-year in October. ¶9. (U) Morgan Stanley, however, issued a more alarmist statement, saying that "the risk that inflation in China is out of control has risen meaningfully." In addition, analysts from Goldman Sachs said at a recent conference that they see inflation as a broader issue related in part to money supply (thus more persistent) and joined with other economic imbalances. PROPERTY PRICES RISING FAST -------------- ¶10. (SBU) Property price increases in October also attracted attention from policymakers. According to a National Development and Reform Commission (NDRC) survey, the real estate price in 70 cities increased by 9.5 percent during the month, with Beijing's housing price up by 17.8 percent. A Beijing-based economic analyst said that containing property price increases will be the main macroeconomic challenge for the government next year with property prices likely to rise by 12 to 15 percent in the first quarter of ¶2008. RANDT