TOP CHINESE ECONOMIST ON ECONOMY, POLITICAL REFORM

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 004671

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NSC FOR SMART AND LOI
STATE FOR E/YON
JOINT STAFF FOR J5/LYNCH

E.O. 12958: DECL: 12/23/2018
TAGS: ECON PGOV CH
SUBJECT: TOP CHINESE ECONOMIST ON ECONOMY, POLITICAL REFORM

Classified By: AMBASSADOR CLARK T. RANDT, JR. REASONS: 1.4 B and D


1. (C) SUMMARY. In a December 22 dinner hosted by Ambassador
Randt, Economic Leading Group Vice Minister Liu He said the
Chinese leadership's top concern over China's economic
slowdown is that it will spark instability in China's urban
centers. Liu, one of the key economic advisors to the Party
leadership, added that some leaders at the recent Central
Economic Work Conference had argued for policies targeting
the rural sector, but the final consensus was to direct
economic stimulus measures at ensuring employment in the
cities. Liu predicted that China's worse-than-expected
fourth quarter 2008 economic performance would cut China's
overall GDP growth rate to 8.5 percent this year, and that
the first quarter of 2009 would be worse. China's leadership
expected China's economy to slowly recover in the last half
of 2009 and allow China to achieve its target of 8 percent
GDP growth for the year. While China's near-term focus would
be economic stability, Liu noted that he and other younger
leaders understood China's long-term success would require
political reform. END SUMMARY.


2. (C) In a private dinner hosted by Ambassador Randt on
December 22 for leading Chinese economist and Vice Minister
Liu He, Liu described his views and those of China's
leadership on China's economic challenges in the coming
years. Educated at People's University with graduate work at
Seton Hall and Harvard Universities, Liu is widely viewed as
China's most influential third generation economist. Most
notably, Liu is Deputy Director of China's Central Leading
Group for Financial and Economic Work, which is the Chinese
Leadership's premier advisory body for economic policy.

Economy Slowing Rapidly, but Worst is Yet to Come
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3. (C) VM Liu told Ambassador Randt that China's
worse-than-expected economic performance in the fourth
quarter of 2008 was expected to drag down China's final GDP
growth rate for 2008 to only 8.5 percent, well below the 11.9
percent GDP growth in 2007 and the 10.4 percent growth in the
first half of 2008. Yet, Liu said, the first quarter of 2009
would even be worse. The Chinese Leadership expected,
however, that China's economy would start to recover enough
during the last half of next year to enable China to meet its
target of 8 percent growth for 2009. He further noted that
for economic policy planning purposes, the Chinese Government
looked to electricity usage and transportation figures among
other indices, rather than harder to substantiate GDP numbers.


4. (C) Liu said he and other Chinese leaders had been aware
as early as March 2008 that China would face economic
difficulties this year. Liu and others had traveled south in
the spring to Guangdong Province and elsewhere to assess
signs that a slowdown would occur. Liu said Guangdong Party
Secretary Wang Yang had been among those who saw early the
coming problems.

China Expects U.S. to Recover in 2009
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5. (C) VM Liu noted that the China's economic leaders
believe the U.S. economy has already bottomed out. They
believe the U.S. has taken very strong actions that have
stabilized the situation. Next year, they expect U.S. growth
to be flat in the first half, before beginning a gradual
recovery in the second half.

Leadership Focused on Urban Centers
--------------


6. (C) VM Liu said that China's leadership had debated in
recent months whether the economic slowdown posed a greater
risk to stability in the rural or urban areas. Consensus had
been reached that urban unrest would pose a more urgent
threat. Thus, the leadership's economic stimulus measures
would be primarily focused on easing the impact of the global
economic slowdown on China's urban areas. Liu contended that
the urban focus includes a focus on China's burgeoning
middle-class and their consumption patterns. Liu noted that
some of the Party elders continued to assert that the global
financial crisis and the impact on China had proven that

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China's reform policies of the past 30 years were mistaken.
Liu, however, dismissed these views as a small minority.

More to Come on Stimulus
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7. (C) Noting that China's leadership remained instinctively
conservative, Liu said it had so far only approved a portion
of the economic stimulus measures that had been proposed.
Liu expected that more of these measures would be necessary
and would be approved as the economy continues to slow
rapidly in the first quarter of next year and beyond. He did
not provide details on the nature of other proposed stimulus
measures.

Property Rights Key to Rebalancing
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8. (C) In discussing China's need to rebalance its economy
and stimulate domestic consumption, Liu said that the heart
of China's reforms needs to be protection of property,
including intellectual property. Chinese consumers were
reluctant to spend and consume because they were frightened
over their economic security. Liu believed this insecurity
derived from a lack of confidence that accumulated wealth and
property would be protected and that people would be able to
enjoy the fruits of their labor and ideas.

Cannot Succeed Without Political Reform
--------------


9. (C) Looking past the near-term priority of managing the
economic slowdown and avoiding instability, VM Liu
volunteered that China would not be able to achieve its
long-term goals without political reform. Liu said that Wang
Yang and other younger leaders were actively discussing this
issue. While all agreed that China's economic policies of
reform and opening are on the right track, they saw that
there was a need for more democratic input into the policy
process, such as involving choices of priorities: whether to
emphasize labor or capital in economic policies.

Comment
--------------


10. (C) VM Liu is one of China's most important economic
thinkers and he has significant influence and access to the
senior leadership. For example, he noted to the Ambassador
during the discussion that he had spent two hours in
discussion with Vice Premier Wang Qishan earlier that same
day. Having just come out of the key Central Economic Work
Conference earlier this month, Liu's views likely reflect the
analysis and policy proposals under review by the Chinese
leadership. Liu's comments about the leadership's focus on
urban stability track with recent public and private comments
by other senior Chinese leaders that suggest they may be more
concerned about graduating university students not finding
jobs than about the return of migrant workers to the
countryside.
Randt