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Viewing cable 07BEIJING7554, CHINA: MODERATE INFLATION HERE TO STAY, EXPERTS SAY

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Reference ID Created Released Classification Origin
07BEIJING7554 2007-12-20 01:05 2011-08-23 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Beijing
VZCZCXRO6183
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #7554/01 3540105
ZNR UUUUU ZZH
P 200105Z DEC 07 ZDK
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 4112
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 2058
RUEHFR/AMEMBASSY PARIS 4225
RUEHRC/USDA FAS WASHDC
UNCLAS SECTION 01 OF 02 BEIJING 007554 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PGOV ETRD EINV CH
SUBJECT: CHINA: MODERATE INFLATION HERE TO STAY, EXPERTS SAY 
(C-AL7-02027) 
 
REF: (A) BEIJING 7233 
(B) BEIJING 6859 
(C) SHANGHAI 553 
(D) BEIJING 6936 
(E) BEIJING 5578 
(F) SECSTATE 166908 
 
SUMMARY 
------- 
 
1. (SBU) Beijing-based economists said this week that moderate 
inflation likely will continue in 2008, and they expect further 
administrative tightening measures by the Central Government in 
order to control prices.  Their comments followed the government's 
announcement earlier this month that China's Consumer Price Index 
(CPI) inflation increased to a new 11-year high at 6.9 percent 
year-on-year in November -- a surprise to most observers who had 
expected inflationary pressures to be easing by now (Refs A and B). 
A Shanghai-based western economist said he is concerned that high 
food inflation is now becoming structurally inflationary (see Ref 
C).  The economists agreed that inflation will remain in the 5 - 7 
percent range next year and is not likely to go higher, but they 
acknowledged the danger of global price increases affecting China 
and they noted the possible impact of higher prices on social 
stability.  END SUMMARY. 
 
CPI STILL SURGING 
----------------- 
 
2. (U) China's CPI rose 6.9 percent year-on-year in November, a new 
11-year high.  Food prices increased 18.2 percent y-on-y with pork 
up 56 percent and cooking oil up 35 percent.  Core CPI (excluding 
food prices) increased 1.4 percent in November, the highest growth 
this year.  Government announcements and press reports indicated 
that an oil price increase in November (Ref D) was the major 
contributor to the non-food price increase during the month. 
 
3. (U) Prior to the release of the November inflation figures, the 
Central Economic Work Conference (an annual economic policy meeting 
held December 3-5 in Beijing) announced that preventing structural 
inflation would be the primary task for China's macroeconomic policy 
in 2008.  The Work Conference, and the National Development and 
Reform Commission (NDRC) Work Conference that followed on December 
7, both emphasized the importance of stabilizing prices.  NDRC 
Chairman Ma Kai and Vice Chairman Bi Jingquan focused on stabilizing 
prices in their public comments. 
 
ECONOMISTS:  INFLATION HERE TO STAY 
----------------------------------- 
 
4. (SBU) Beijing-based economists expressed surprise that the CPI 
increased nearly 7 percent in November and said that the new figure 
casts doubts on claims previously made by the Central Government and 
economic analysts that China's inflation problem is likely to be a 
short-term trend driven by a food supply shock.  Rather, the current 
situation indicates that moderate inflation (5 - 7 percent) likely 
will continue in 2008.  Wang Tongsan, Director of the Institute of 
Quantitative and Technical Economics at the China Academy of Social 
Sciences (CASS), who is one of the few analysts who has consistently 
pointed to underlying structural factors in the economy that could 
lead to more inflationary pressure (Ref E), said again this week 
that China is facing a serious inflation problem that will last into 
2008, particularly because price surges -- both in China and 
internationally -- in the latter half of 2007 will have a lagging 
impact on next year's CPI.  Sun Bulei, an economist at the Stock 
Exchange Executive Council (SEEC), said he would have expected the 
CPI to be decreasing by now rather than increasing from 6.5 percent 
y-on-y in October to 6.9 percent in November. 
 
5. (SBU) Our contacts agreed that the Central Government will need 
to implement additional administrative tightening measures in order 
to control prices.  Those measures are late in coming, said Wang 
Boming, President of the SEEC.  He stated that the Central 
Government should have introduced tightening measures in the summer 
but government officials failed to agree on the best course of 
action because of disagreement on the root cause of the inflation. 
Even if they were to agree, Wang said, policymakers have few tools 
to counter inflation and are virtually powerless to rein in local 
governments, which are not interested in slowing investment. 
 
6. (SBU) Wang Tongsan at CASS agreed, stating that on both fiscal 
policy and monetary policy, the government's hands are tied.  The 
government should pursue a more prudent fiscal policy with slower 
growth in fixed asset investment, he said, but there is a conflict 
 
BEIJING 00007554  002 OF 002 
 
 
because the government also wants to promote development in western 
China and rural areas by providing budgetary support.  In addition, 
provincial officials in other parts of the country (ex. Central 
China) want to continue to attract investment and boost GDP growth. 
The government could tighten its monetary policy by speeding up the 
pace of exchange rate appreciation and/or raising interest rates but 
is reluctant to do either because China benefits from the 
undervalued exchange rate and does not want the interest rate gap 
with the United States to grow. 
 
NOT JUST ABOUT FOOD PRICES ANYMORE 
---------------------------------- 
 
7. (SBU) Stephen Green, the Senior Economist at Standard Chartered 
in Shanghai, maintained his position that higher food prices are 
hurting average consumers (Ref C) and added that the cumulative 
effect of high food prices over the past six months is now creating 
a structurally inflationary situation.  The oft-heard government 
argument that inflation is not a significant problem because core 
inflation remains low is no longer a valid position, Green said, as 
a high-inflation environment that persists for 6 - 12 months is one 
that is structurally inflationary and will affect non-food sectors. 
Wang Boming agreed that the focus on food prices to date has been 
misleading because it has ignored other causes of higher prices 
(fast GDP growth, higher international prices, excess liquidity in 
the money supply, etc.), and the government will have to address 
those problems in 2008. 
 
THE IMPACT OF GLOBAL PRICES 
--------------------------- 
 
8. (SBU) Contacts uniformly agreed that higher global prices for 
energy (oil) and food (grains) will affect prices in China in 2008. 
Some also said they are concerned about the possible impact on China 
of higher inflation in the United States.  (Note:  Econoff delivered 
Ref F talking points to those interested in the financial situation 
in the United States.  End Note.)  Wang Tongsan at CASS said that he 
believes higher international prices will lead directly to higher 
domestic inflation in China in the coming year. 
 
SOCIAL STABILITY CONCERNS STILL PARAMOUNT 
----------------------------------------- 
 
9. (SBU) Economists also stated that the government's efforts to 
address inflation are primarily due to continued concerns about the 
impact of rising prices on social stability.  Wang Boming said that 
the government is in a difficult position because it wants to 
encourage fast GDP growth (9.5 to 10.5 percent) to maintain social 
stability, but GDP growth in 2007 (which is likely to exceed 11.5 
percent) has been too fast, thereby fueling inflation.  Indicating 
the level of concern about inflation at the local government level, 
a December 12 Reuters report stated that a recent survey of 154 
officials studying at the Communist Party's Central Party School 
showed that 30.5 percent of officials believe inflation is China's 
most pressing social problem followed by income inequality at 23.4 
percent. 
 
COMMENT:  A TURNING POINT? 
-------------------------- 
 
10. (SBU) It appears that moderate inflation will continue in early 
2008, but there are no indications yet that inflation will reach 
dangerous levels of 10 percent or higher.  Nevertheless, the 
government is concerned about on-going 5 - 7 percent inflation and 
wants to control prices in an effort to ensure social stability.  We 
are likely to see more subsidies for food and energy for low-income 
groups.  Our discussion with local economists suggest that this may 
be a turning point for policymakers in their perception of 
inflation, as there now are few who believe short-term food 
inflation is the only factor leading to price increases.  Inflation 
will continue in 2008, and government officials and economic 
analysts now appear to recognize that the Central Government needs 
to address price increases not only as a short-term food supply 
shock but as a long-term structural issue.  The government's ability 
to address inflation through market mechanisms or administrative 
controls, however, remains limited. 
 
RANDT