Party Economist Looks to Control Prices,

UNCLAS SECTION 01 OF 03 BEIJING 003257 C O R R E C T E D C O P Y//PARA 9 & 14 MARKING// SENSITIVE SIPDIS STATE FOR EAP/CM E.O. 12958: N/A TAGS: ECON EFIN WTRO ENRG EAGR CH SUBJECT: Party Economist Looks to Control Prices, Growth; Offers opinion on Doha Ref: Internal note 8/5/08 BEIJING 00003257 001.3 OF 003 ¶1. (SBU) Summary: Economic M/C met with Senior Communist Party Economist Zheng Xinli to discuss current economic issues. Zheng noted that the declining dollar was eroding the value of China's dollar-denominated assets. He thought China's inflation was the result of externalities such as rising international agricultural and oil prices, suggesting China should allow prices to rise only slowly and should protect domestic pork and edible oil producers while limiting foreign investment. Zheng felt comfortable with slower growth, particularly if it implied a rebalancing of the domestic economy. Offering his opinion on Doha, Zheng thought that China had supported India for political reasons, and that China's agricultural sector was already open. End summary. ¶2. (SBU) Econ M/C met with Chinese Communist Party Central Policy Research Office Vice Minister Zheng Xinli to discuss current economic issues. (Note: Zheng is number two at the CPC CPRO, the party's internal think tank. He directly advises the party leadership on economic issues. End note.) Covering a wide range of economic topics, Zheng speculated about the impact of global economic factors on the Chinese economy. Depreciating Dollar, Sub-prime Crisis -------------- ¶3. (SBU) Zheng said that the depreciating dollar was eating away at the value of USD assets held by China. He noted, with a smile, that Xia Bin's suggestion that China sell USD assets had "even attracted the U.S. President's attention." (Note: In October 2007, State Council Development Research Center Institute of Financial Research Director Xia Bin was quoted as saying that if the United States imposed trade sanctions on China, Beijing should not rule out using foreign reserves as a "bargaining chip" in talks with the United States. End note.) (Comment. It is questionable whether reports of Xia's comments were accurate. CASS economist He Fan had also been mentioned in the same report as having made similar comments. When Emboffs met He subsequently to clarify what he had said, he claimed he had been misquoted. Econ M/C noted this fact in replying to Zheng. End comment.) ¶4. (SBU) Zheng blamed slowing Chinese export growth on the U.S. sub-prime mortgage crisis, which he attributed to excessive U.S. deregulation and over reliance on markets resulting from the repeal of the Glass-Steagell Act. Zheng criticized Congressional pressure on China, saying the Congress should listen to the "large number" of prominent U.S. economists, for example Joseph Stiglitz, who have argued for a less confrontational approach. Controlling Rising Prices -------------- ¶5. (SBU) Moving on to inflation, Zheng noted that China had raised the price of oil products 18 percent this year, lifting CPI by one percent annually. Still, China's gasoline prices--at only 60 percent of U.S. prices--remain well below the norm in developed countries. He stated oil, grain, and steel products all faced price pressure, but thought prices should be adjusted gradually over several years in order to make the increases more "affordable." (Note: DRC's Xia Bin recently offered similar suggestions in the Chinese media. End note.) Zheng, however, also commented favorably on recent adjustments to domestic energy prices, and said prices should be further adjusted to eventually reflect global market prices. ¶6. (SBU) Zheng said that this round ofinflation was caused by a surge in agricultural prices such as pork and edible oils, and not by excess liquidity. As a result, he objected to the idea that tighter monetary policy would reduce inflation. He thought looser credit and export rebates would help small- and medium-sized enterprises. He also suggested limiting investment and encouraging consumption to spur domestic demand. Pork and Oil Protection -------------- ¶7. (SBU) Zheng strongly disagreed with the suggestion that blue ear disease had caused a pork shortage, stating that the Ministry of Agriculture had made up the excuse to BEIJING 00003257 002.5 OF 003 "shirk their responsibilities." Pork prices have now declined for eight consecutive months, causing Zheng to worry that they were declining too quickly. He proposed a "price protection system" and controlled imports to protect pig farmers and pork producers. ¶8. (SBU) Likewise, Zheng said that 62 percent of edible oil was imported and 70 percent of domestic production was by foreign-invested companies that imported oil crops from their home countries. He attributed China's relatively high domestic edible oil prices to this dependence on foreign producers-- mentioning Cargill by name. He called for China to increase its edible oil self-sufficiency to curb prices, and noted that as a factor in the decision to add edible oil production to the restricted list in the investment catalog in order to limit foreign ownership. Export Controls -------------- ¶9. (SBU) Zheng noted that U.S. efforts to block Chinese acquisition of advanced technology would fail, since China can source these products from other countries or develop the technology indigenously. He added that efforts to do so will only hurt U.S. exports and employment. Future Growth -------------- ¶10. (SBU) Zheng said China's GDP should grow more slowly, at about 9 percent a year. He was pleased that China's economy was rebalancing, with middle and western provinces growing faster than the coast; heavy industry growing faster than light industry; private enterprises growing faster than state-owned enterprises; and agriculture sector investment growing faster than industry and service sector investment. He reported that fiscal revenue was rising and the trade surplus was declining. (Comment. While it is true that, at the moment, many of the inland provinces and non- manufacturing sectors are growing relatively quickly, this is more likely due to a cyclical downturn in exports and construction than serious rebalancing of China's economic structure. End comment.) Doha -------------- ¶11. (SBU) Zheng said the United States should criticize India instead of China for failing to reach agreement on opening agriculture markets. He said China supported India because of "political and other concerns." He repeated several times that China still has a low per-capita income, and as a developing country could not possibly have split with India on this issue. He claimed that China has a more open agriculture market than many countries, and imports huge quantities of soybeans and cotton every year. That said, he stated China should not open its grain market. Comment -------------- ¶12. (SBU) By virtue of his position and his opinions, Zheng Xinli is very influential within the Chinese policymaking community. During the recent debate over whether China should maintain its current monetary policy stance--which the Chinese characterize as "tight," but which by many normal economic standards is still fairly loose--to manage inflation or should increase credit to hurting exporters and developers, Zheng argued for taking a middle road with targeted fiscal measures but continued credit quotas. He noted there are two diametrically opposed schools of thought on this issue, one led by former CASS economist Liu Guoguang which opposes monetary easing, and a second represented by former Beijing University Economics Professor and CPPC member Li Yining which argues that China has already entered a period of disinflation. ¶13. (SBU) Zheng is a strong proponent of economic restructuring aimed at spreading the benefit of China's economic growth to previously disadvantaged segments of the country. Zheng also oversees an Agricultural Policy Institute which has done extensive work on the rural economy. His comments on Doha likely reflect his affinity for China's farmers and belief that China's agricultural sector is already open to the international market. His views are not unusual within the CPC. BEIJING 00003257 003.4 OF 003 Biographical Note -------------- ¶14. (SBU) This is our second meeting with Zheng. The first was at adiner hosted by U.S. direct selling company officials who were sponsoring Zheng on a visit to the United States to investigate the direct selling industry. Both times, we found him accessible and willing to share his opinions freely. This is in contrast to officials from the State Council policy office who have consistently turned down our requests for appointments, explaining that their unit is restricted from meeting foreign contacts. Also attending the lunch were the Director of Economic Research Jin (name unknown),and Zheng's personal secretary Zhao Zhijie. Zheng told us he may be traveling again to the United States later this year. RANDT