VZCZCXRO4029
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #2239/01 2921047
ZNR UUUUU ZZH
O 191047Z OCT 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0295
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 022239 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
USDOC FOR 4420 
TREASURY FOR OASIA/CUSHMAN 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTING, ALTMAN 
STATE PASS CEA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN CH
SUBJECT: LOWER THIRD QUARTER GROWTH BUT MORE TIGHTENING 
LIKELY 
 
SUMMARY 
------- 
 
¶1. (SBU) China's year-on-year GDP growth rate, as measured on 
a quarterly basis, fell from 11.3 percent in the second 
quarter to 10.4 percent in the third quarter, a result in 
line with numerous private sector forecasts.  The decline 
comes in the wake of numerous cooling measures undertaken by 
the Central Government in recent months, including hikes in 
interest rates and the reserve requirement as well as 
administrative measures targeting specific sectors such as 
housing and steel.  Economic policy makers appear set to 
interpret the third quarter result as a sign that recent 
efforts to slow the economy are working but should continue. 
END SUMMARY. 
 
FALL IN THE GDP GROWTH RATE 
--------------------------- 
 
¶2. (U) National Bureau of Statistics (NBS) figures released 
on October 19: 
 
    GDP Growth Rate (percent, year-on-year) 
 
    2005 (Full Year)  10.2 
 
    2006 (YTD)        10.7  * released October 19 
    -- 1Q             10.3 
    -- 2Q             11.3 
    -- 3Q             10.4  * released October 19 
 
¶3. (U) The third quarter result, in line with private sector 
forecasts, still indicates a growth rate above that recorded 
in 2005.  The recent downtrend on a quarterly basis, however, 
is significant because it suggests that recent efforts to 
cool China's economy may be having some effect.  Measures 
employed in recent months have included two interest rate 
hikes of 27 basis points each, a rise in bank reserve 
requirements, and a range of administrative actions aimed at 
cooling lending and activity in sectors such as housing and 
steel. 
 
¶4. (U) NBS statistics also show continued low inflation, with 
a 1.3 percent year-to-date rate of increase in general 
consumer prices. 
 
OTHER SIGNS OF COOLING 
---------------------- 
 
¶5. (U) Other recent data show further signs of cooling: 
 
o The widely watched urban fixed asset investment (FAI) 
growth rate is on a downward trend over recent months: 
 
    2006 Urban Fixed Asset Growth 
    (percent, year-on-year) 
 
    June               34.0 
    July               27.0 
    August             21.5 
    September          23.6 
 
o The money supply (M2) grew at 16.8 percent in September, 
its slowest pace in 14 months. 
 
o Value added industrial output growth fell to 15.7 percent 
in September from 19.5 percent in August. 
 
REACTION 
-------- 
 
¶6. (SBU) Reacting to the growth figures, NBS Spokesman Li 
Xiaochao, in a released statement, trumpeted "the good 
momentum of steady and fast growth" but referenced a 
continued need to enhance "the achievements brought by 
macro-regulatory control."  Chinese Academy of Social 
Sciences Senior Research Fellow Wang Tongshan, who provides 
input to government officials on economic policy issues, told 
us October 19 that the lower GDP growth rate suggests the 
government's macroeconomic tightening measures are showing 
results.  He said that there is still too much investment and 
 
BEIJING 00022239  002 OF 002 
 
 
excess liquidity in the economy and predicted sustained 
cooling efforts over the next six months. 
 
COMMENT 
------- 
 
¶7. (SBU) There may be a cooling trend, but the data 
supporting it are still young.  Some private economists have 
pointed out contrary indicators in recent weeks, such as 
higher growth rates in power consumption, cement production, 
and freight traffic.  Consequently, several more months may 
be needed to conclude whether recent efforts to calm the 
economy have been successful and also whether they have 
staying power. 
Randt