VZCZCXRO3664
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #2876/01 3030923
ZNR UUUUU ZZH
P 300923Z OCT 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 1078
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 BEIJING 022876 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4420 
STATE PASS USTR FOR STRATFORD, WINTER, ALTBACH 
STATE PASS CEA FOR BLOCK 
TREASURY FOR OASIA/CUSHMAN 
USDA/ERS FOR LOHMAR, TUAN, SYLVANA LI 
USDOL FOR ILAB 
NSC FOR SHRIER, HUNTER 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EAGR ELAB PGOV SOCI CH
SUBJECT: LEADING CHINESE ECONOMIST ON CHINA'S CHALLENGES 
 
 
SUMMARY 
------- 
 
¶1. (SBU) One of China's leading economists briefed China 
Mission Economic Officers on the country's economic 
challenges.  Although he expressed concerns about income 
inequality, deflation, and the challenges of following 
through on economic reforms, his overall message was that 
the quality of leadership on economic matters warrants 
broad optimism.  Participating Econoffs responded in 
particular with questions about China's ability to pursue 
income distribution and economic restructuring goals under 
the Eleventh Five-Year Plan (FYP).  The researcher insisted 
that the FYP is a step in the right direction towards 
rebalancing growth and solving socioeconomic problems, 
including China's income disparity, aging population, 
resource inefficiency, and social instability.  END SUMMARY. 
 
BIO NOTE 
-------- 
 
¶2. (SBU) Justin Yifu Lin founded the China Center for 
Economic Research at Beijing University in 1994.  Lin, 
considered one of China's leading economists, also advises 
the Central Government on economic policy.  Lin earned his 
PhD in Economics from the University of Chicago in 1986. 
 
CHALLENGES FOR CHINA'S ECONOMY 
------------------------------ 
 
¶3. (SBU) At a mid-October briefing attended by Economic 
Officers from Beijing, Shanghai, Chengdu, Guangzhou, and 
AIT Taipei, Lin noted that the Eleventh FYP (2006-2010) is 
based on China's strong economic performance since reform 
and opening in 1978, particularly the strong growth of the 
past three years (10.0 percent in 2003, 10.1 percent in 
2004, and 10.2 percent in 2005).  He emphasized, however, 
that during the Eleventh FYP, China would need to overcome 
six significant challenges:  1) deflation, 2) low per 
capita income, 3) resource shortages, 4) income disparity, 
5) an inadequate social safety net, and 6) the government's 
unfinished reform agenda. 
 
THE THREAT OF DEFLATION 
----------------------- 
 
¶4. (SBU) Lin said that most Chinese economists are less 
concerned with inflation than they are with deflation. 
From 2003 to 2005, overheating in several energy-intensive 
sectors prevented deflation by artificially raising the 
prices of construction materials.  In the wake of 2005-2006 
investment growth rates above 25 percent, the Chinese 
Government is now taking action to slow things down and 
this brings with it a strong possibility of deflation. 
China's current low inflation rate of approximately 1 
percent would be considered deflation in almost any other 
country, he said. 
 
GROWING INCOME GAPS 
------------------- 
 
¶5. (SBU) A longer-term concern is low per capita income, 
Lin stated.  Most non-Chinese analysts fail to recognize 
that the country's per capita income remains very low at 
USD 1,730 per year, which amounts to only 4 percent of the 
U.S. average, he said.  Further complicating matters, 
income disparity is growing, potentially fueling social 
instability.  China's Gini coefficient is now 0.45, with 
urban income three times higher than rural incomes.  (Note: 
The Gini coefficient measures income inequality in a 
society, with a measure of 0 equaling full equality and 1 
equaling full inequality.  The U.S. Census Bureau estimates 
the Gini coefficient in the U.S. in 2004 for money income 
to be 0.45.  End Note.) 
 
FACING SOCIAL CONCERNS 
---------------------- 
 
 
BEIJING 00022876  002 OF 003 
 
 
¶6. (SBU) Lin said China has consumed a disproportionate 
amount of resources during its rapid economic growth. 
According to Lin's statistics, in 2004, China's GDP was 
only 4 percent of the global total, but the country 
consumed 12 percent of the world's energy and 15 percent of 
its fresh water.  China must also face rapid aging:  more 
than 12 percent of the population is over 60, and the 
social security fund is estimated to have a shortfall of 
RMB 300 billion to RMB 1 trillion (USD 37.5 billion to USD 
125 billion). 
 
THE GOVERNMENT'S UNFINISHED REFORM AGENDA 
----------------------------------------- 
 
¶7. (SBU) Lin endorsed the Eleventh FYP as a means to 
address problems resulting from unfinished reforms, 
including non-performing loans, county-level government 
debt, and state-owned enterprises with poor performance. 
President Hu Jintao's emphasis on scientific development 
steers the government towards continuing to rely on 
economic development and reform to solve emerging problems 
but also recognizes that China needs to achieve balanced 
growth, especially when facing problems such as income 
inequality or resource inefficiency. 
 
LIN'S OPTIMISTIC OUTLOOK 
------------------------ 
 
¶8. (SBU) Lin strongly intimated that the government will be 
able to resolve China's most pressing socioeconomic 
problems.  According to Lin: 
 
-- Deflation will not prevent the economy from maintaining 
robust growth of at least 8 percent per annum, as deflation 
would be caused by overinvestment in certain sectors rather 
than by a bursting bubble in those sectors. 
 
--The Eleventh FYP's New Socialist Countryside initiative 
may unleash a significant pending demand and absorb 
existing excess capacities. 
 
--State-owned enterprise (SOE) reforms will reduce the need 
for policy loans in the banking sector, and the entry of 
foreign banks will speed up banking reforms. 
 
--The Chinese Government remains in firm control and social 
unrest is unlikely to grow beyond localized conflicts.  FYP 
strategies on income distribution, addressing regional 
disparities, and promoting social development will 
alleviate social tensions in rural areas. 
 
COMMENT:  TOO OPTIMISTIC? 
------------------------- 
 
¶9. (SBU) China Mission Economic Officers attending the 
presentation believe Lin's assessment of China's policy 
prescriptions is overly optimistic.  Lin's briefing perhaps 
reflected a common problem in Beijing where academics often 
are co-opted into the policy process and then feel 
compelled to defend those policies.  We found it 
interesting, for example, that Lin took credit during the 
briefing for contributing to formulating the New Socialist 
Countryside policy and then proceeded to exude a degree of 
optimism about the policy that we believe is unfounded. 
 
¶10. (SBU) During the briefing, Econoffs questioned Lin on a 
variety of topics, including:  the impact of deflation on 
economic growth, funding fixed asset investment through 
retained earnings, the socioeconomic situation in the 
countryside, trade and services liberalization, reform of 
equities markets and securities firms, implementation of 
the FYP, and mergers and acquisitions regulations.  Lin's 
answers on several topics sounded like Party-line talking 
points, particularly with regard to rural policy, financial 
reforms, and liberalization of trade and services -- all 
areas where we do not feel China's progress justifies Lin's 
rosy outlook. 
 
 
BEIJING 00022876  003 OF 003 
 
 
RANDT