VZCZCXRO1879
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0580/01 0510023
ZNR UUUUU ZZH
O 200023Z FEB 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5122
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 BEIJING 000580 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
FOR EAP/CM AND EEB 
USDOC FOR 4420 
TREASURY FOR OASIA/ISA DOHNER 
STATE PASS USTR -- STRATFORD PASS CEA FOR BLOCK 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV CH
 
SUBJECT: INFLATION, EXACERBATED BY SNOWSTORMS, HITS A NEW 11-YEAR 
HIGH 
 
REF: 07 BEIJING 6286 
 
SUMMARY 
------- 
 
¶1. (SBU) China' National Bureau of Statistics announced today that 
consumer inflation reached a new eleven-year high of 7.1% in 
January.  This may well be followed by an even higher figure for 
February that would be released on March 11, while the National 
People's Congress (NPC) is in session.  Once again, agricultural 
prices explain most (85%) of the spike, the impact of which is felt 
disproportionately in poor and rural areas where families spend more 
of their budget on food.  The increase came despite price controls 
and other price-related measures announced in January.  The recent 
round of elevated inflation began last July, and economists have 
predicted for months that it would soon subside, only to be 
surprised at its persistence.  There is a risk going forward that 
inflationary expectations will take root among consumers, dragging 
out the process.  END SUMMARY 
 
INFLATION SPIKE CONTINUES 
------------------------- 
 
¶2. (SBU) China's National Bureau of Statistics announced today that 
consumer inflation reached a new eleven-year high of 7.1% in 
January.  Food prices accounted for 85% of the increase; non-food 
inflation was 1.5%.  Producer prices rose 6.1%, driven by raw 
materials and transportation bottlenecks and pointing to possible 
further inflation pressures ahead.  February figures -- to be 
released March 11 during the NPC -- may be even higher because of 
snowstorm effects not captured in the January numbers, according to 
several economists. 
The increase came despite price controls and soft measures announced 
in January.  The State Council, in an apparent bid to curb inflation 
expectations, had announced there would be no price increases for 
goods already controlled (e.g., energy and utilities), that large 
producers would need approvals to raise food prices, and that 
retailers would have to notify authorities if they raised certain 
categories of food prices beyond stated thresholds. 
 
SURPASSING EXPECTATIONS 
----------------------- 
 
¶3. (SBU) The persistence of the CPI increases is a surprise.  A look 
back at predictions from last fall shows major investment bank 
economists at outfits like CICC, JP Morgan, and RBS describing the 
CPI as at its likely peak.  Economists at Chinese think-tanks took a 
similar view but placed more emphasis on the danger of fanning 
inflationary expectations (reftel).  Chinese Government officials, 
some speaking on the margins of the 17th Party Congress in October, 
also raised the potential for igniting inflationary expectations 
(e.g., demand for higher wages that would lead to further 
inflation), but gave little attention to the possibility that food 
price increases could drag out for this extended period. 
 
EXPECT MORE 
----------- 
 
¶4. (SBU) There are several reasons more inflation-related headlines 
are likely in the coming months.  Food prices are still rising in 
the wake of snowstorm damage.  Producer price inflation is also on 
the rise, suggesting that energy and raw material prices have yet to 
fully play out on the consumer side here.  The locally-based Bank of 
America economist predicts a 7.8% figure for the February CPI as a 
result.  Despite ongoing monetary "tightening," the rates of money 
supply and credit growth are still very high (e.g., 20-month high 
for the money supply increase in January).  Finally, the longer that 
price hikes are sustained, the greater the risk of inflationary 
expectations settling in, leading to secondary effects later on. 
 
RURAL EFFECTS 
------------- 
 
¶5. (SBU) A valued academic economist contact expressed concern to us 
today about disproportionate effects in the countryside.  Measured 
inflation is already higher in rural areas (7.7% last months vs. 
6.8% in urban areas), and rural families spend more of their budgets 
on food.  The economist commented that the widespread view that 
farmers are benefiting from higher prices is misplaced: the effects 
are highly variable across the country and now, in the wake of the 
snowstorms, many farmers are contending with crop damage.  Further, 
farmers must contend with rising transportation costs and 
infrastructure bottlenecks, he said. 
 
BEIJING 00000580  002 OF 002 
 
 
 
RANDT