VZCZCXRO6715
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #6286/01 2680718
ZNR UUUUU ZZH
P 250718Z SEP 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 2187
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 006286 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
STATE PASS USTR 
TREASURY FOR OASIA/DOHNER 
COMMERCE FOR 4420 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD ELAB PGOV CH
SUBJECT: PARTY CONGRESS ECONOMIC POLICY IMPACT SEEN AS 
LIMITED, BUT INFLATION REMAINS A POLITICAL CONCERN 
 
REF: A. BEIJING 5578 
 
     ¶B. BEIJING 5627 
 
 
   SUMMARY 
   ------- 
 
¶1. (SBU) Several ECON contacts have told us that next month's 
Party Congress is unlikely to affect China's macroeconomic 
policies.  One economic analyst opined that personnel changes 
at the Ministry of Finance could play a role in China's 
fiscal policy, but said the overall direction of reform would 
remain unchanged.  All who we spoke to agreed, however, that 
inflation is no longer just an economic issue; it is 
increasingly becoming a political concern.  They see recent 
government statements and actions on inflation as made with 
an eye towards the Party Congress.  Investment bank research 
reports also support this view.   END SUMMARY. 
 
NDRC on the Sidelines 
--------------------- 
 
¶2. (SBU) A research economist at the National Development 
Reform Commission (NDRC) said that China's top economic 
policymaking body has little involvement with preparations 
for the Party Congress (in contrast to more extensive 
involvement with the March National People's Congress, or 
NPC).  The contact believes that personnel changes will not 
affect the direction of China's economic reforms and expects 
no significant economic policy changes to result from the 
Congress.  It will be more interesting to watch the March 
2008 session of the NPC -- the first NPC session after the 
Party's leaders have assumed their new positions, according 
to this contact. 
 
Economists Are Not "Reading the Tea Leaves" 
------------------------------------------- 
 
¶3. (SBU) A locally-based private sector economist echoed the 
NDRC contact's position that the Party Congress would not 
affect economic policy, suggesting that economists have shown 
little interest in "reading the tea leaves" prior to the 
Party Congress because there is uniform agreement that 
economic policies will remain unchanged.  The only possible 
exception is fiscal policy under new leadership at the 
Ministry of Finance.  Economists are therefore interested in 
personnel changes at MOF and are watching to see if China 
will pursue a more aggressive fiscal policy in 2008. 
 
Inflation a Growing Political Concern 
------------------------------------- 
 
¶4. (SBU) Giving remarks at an Embassy-hosted conference on 
September 18, Wang Tongsan, Director of the Institute of 
Quantitative and Technical Economics at the Chinese Academy 
of Social Sciences, reiterated his position (Ref A) that 
inflation is a growing political concern for China's 
leadership, especially as the Party Congress approaches. 
Referring to the news that the Consumer Price Index (CPI) had 
increased 6.5 percent year-on-year in August, the most rapid 
pace in ten years, Wang said that there are two schools of 
thought within the government about the dangers of inflation. 
 One view, held by the NDRC and the National Bureau of 
Statistics, is that the spike is limited to food price shocks 
and thus temporary.  Wang said, however, that he is more 
inclined to agree with the People's Bank of China (PBOC), 
which has stated that recent inflationary trends could spark 
expectations of further price hikes and thus push up wage 
rates and core inflation items, leading to a more serious 
problem. 
 
¶5. (SBU) A contact at the State Council's Development 
Research Center (DRC) added that nearly all of his time 
recently has been devoted to researching the food inflation 
problem, which has been the primary contributor to China's 
recent price spike.  The DRC believes the problem will be 
short-lived, but the contact said the leadership is very 
concerned. 
 
Taking Steps to Counter Inflation 
--------------------------------- 
 
¶6. (U) With the Party Congress less than a month away, the 
government has taken more steps recently to bring inflation 
 
BEIJING 00006286  002 OF 002 
 
 
under control.  The Ministry of Commerce (MOFCOM) announced 
on September 18 that a recent survey indicated that the CPI 
would increase by more than four percent for the year in 2007 
after three consecutive years at 1.5 percent.  The survey 
also reported that prices are beginning to rise not only for 
food products but also for clothing.  The general population 
is noticing the changes: the latest quarterly PBOC survey 
covering 50 cities found that 47.1 percent of respondents 
believe prices are too high, a sharp increase from the 29.5 
percent figure from the previous quarter. 
 
¶7. (U) The government has also frozen prices it controls for 
the remainder of the year, a move widely assumed to be aimed 
at promoting stability during the upcoming holidays 
(Mid-Autumn Festival and National Day) and Party Congress. 
Six ministries issued a statement that local governments are 
not allowed to raise prices without the NDRC's approval. 
 
PRIVATE ECONOMISTS SEE IT THE SAME WAY 
-------------------------------------- 
 
¶8. (U) RBS Emerging Markets Strategist Ben Simpfendorfer 
suggested in a research note that the recent flurry of policy 
activity surrounding inflation exaggerates the immediate 
danger and is instead tilted towards placating public opinion 
ahead of the Party Congress.  The price freezes, for example, 
apply to goods that are not important drivers of inflation. 
CLSA Managing Director Andy Rothman believes the government 
understands inflation is presently tied to temporary supply 
factors and does not tie the current trends to Party Congress 
outcomes.  He expects the economic policy aspects of the 
Party Congress to focus on emphasizing previously announced 
"harmonious society" policies. 
 
Randt