VZCZCXRO4298
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0637/01 0530133
ZNR UUUUU ZZH
O 220133Z FEB 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5259
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 000637 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM AND EEB/OMA 
TREASURY FOR OASIA/DOHNER 
USDOC FOR 4420 
STATE PLEASE PASS USTR FOR STRATFORD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL EINV CH JP
SUBJECT: China:  Bank of Japan Representative discusses Chinese 
economy 
 
SUMMARY 
------- 
 
¶1. (SBU) On February 4, Finatt Minister Counselor and Econoff 
exchanged views on the Chinese economy with Kiyoyuki Seguchi, Bank 
of Japan's (BOJ) Chief Representative in China.  Seguchi predicted 
that China's GDP -- buoyed by growing fixed asset investment and 
rising domestic consumption -- will likely grow by more than 10 
percent in 2008 even as exports slow in the wake of the subprime 
crisis.  He said inflation will remain a top government concern and 
forecasted and predicted 6 percent average CPI growth rate for the 
first half of the year.  On the renminbi (RMB), Seguchi stated he 
expects continued gradual appreciation against the U.S. dollar, 
reaching an optimal point between 5.5 and 6.5 RMB/USD this year, but 
added that while a 6.5 RMB/USD exchange rate would probably be 
acceptable to Chinese leaders, a 5.5 RMB/USD rate would be "less 
palatable."  Commenting on the domestic economic impact of the 
Japanese yen's rapid appreciation against the U.S. dollar in the 
mid-1980s, Seguchi said policymakers' insistence on maintaining low 
interest rates well into 1989 -- not the yen's appreciation itself 
-- caused the development of a "bubble economy." 
 
GDP growth will remain strong in 2008 
----------------------------------- 
 
¶2. (SBU) Seguchi estimated that despite a possible decline in 
exports due to the U.S. subprime crisis, China's GDP growth will 
exceed 10 percent in 2008, although growth could be slightly lower 
if commodities prices rise sharply.  Seguchi noted that between 2005 
and 2007, China ran a large trade surplus, which boosted GDP by 
about two points.  Even if the trade surplus narrows due to slower 
growth in exports to the U.S., Japan, and Europe, China will 
maintain an approximate 9.4 percent GDP growth in 2008, he argued. 
 
¶3. (SBU) Seguchi explained that governmnt fixed asset investment 
(FAI) and rising domestic consumption could make up for slower 
export growth.  He noted that historically, government FAI has risen 
following changes in provincial and national level leadership.  With 
new provincial administrators in place across the country this year, 
more public funds will be channeled into infrastructure and 
development projects.  The central government views the development 
of Western China as a top priority, Seguchi said, and investment in 
the West and in areas affected by recent snowstorms will likely 
continue to expand.  Seguchi explained that domestic consumption 
will also increase this year due to job creation, higher wages, and 
rising farm incomes stemming from higher agricultural prices. 
 
CPI growth will increase at least until mid-year 
----------------------------------- 
¶4. (SBU) Seguchi expects CPI growth to hover around 6 percent until 
June before declining throughout the remainder of the year.  He 
noted, however, that this forecast could change quickly and recalled 
that last year CPI increased rapidly during the summer months -- by 
1 percent each month in June, July, and August.  Recent snowstorms, 
he explained, have already caused short-term inflation and may also 
trigger longer-term inflationary expectations.  Such expectations 
could drive wages upward, in turn fueling further CPI growth. 
 
Renminbi will appreciate gradually 
---------------------------------- 
 
¶5. (SBU) Seguchi said he encouraged his contacts in the Chinese 
government to allow the renminbi (RMB) to appreciate gradually 
against the U.S. dollar following the October 2007 National Party 
Congress (NPC), noting that rapid appreciation before the NPC would 
have been politically unfeasible.  He acknowledged the possibility 
that gradual appreciation could lead to currency speculation 
opportunities and excess foreign currency inflows, but he argued 
that a big jump in RMB appreciation would be too risky for the 
Chinese government, as the possible short-term destabilizing effects 
could run counter to the Hu Administration's "harmonious society" 
agenda.  Seguchi stated that if the RMB appreciates too quickly, 
exporters could face bankruptcy and domestic farmers would be hurt 
by a rapid increase in cheaper agricultural imports.  Weakened 
manufacturing and agriculture sectors could pose a threat to the 
Hu/Wen leadership, he explained. 
 
¶6. (SBU) In Seguchi's view, the USD/RMB exchange rate should reach 
an optimal point between 5.5 and 6.5 RMB/USD this year.  He 
explained that while a 6.5 RMB/USD exchange rate would probably be 
acceptable to Chinese leaders, a 5.5 RMB/USD rate would be "less 
palatable," as it could hurt exporters and farmers.  Seguchi stated 
that if the RMB/USD exchange rate reaches 6.5 RMB/USD by the end of 
June and the economy remains stable, the RMB should continue to 
 
BEIJING 00000637  002 OF 002 
 
 
appreciate in order to prevent a build up of excess liquidity, a 
problem that he considers much larger than inflation or 
unemployment. 
 
Japan's bubble economy not attributed to yen appreciation 
---------------------------------- 
 
¶7. (SBU) Seguchi reported that he is often asked by Chinese contacts 
whether the Japanese yen's rapid appreciation against the U.S. 
dollar following the 1985 Plaza Accord contributed to Japan's 
economic woes in the late 1980s and early 1990s.  In Seguchi's view, 
policymakers' stubborn commitment to loose monetary policy, not the 
yen's appreciation, is to blame.  He argued that although the yen's 
appreciation had an immediate negative effect on exporters, 
companies producing for Japan's domestic market saw a rapid rise in 
profits.  By 1986, macroeconomic indicators revealed that the 
economy had already begun to recover from the 1985 appreciation 
shock.  But after years of advocating export-led growth, the 
Japanese government continued to prop up exporters by keeping 
interest rates low until 1989.  This contributed to asset price 
inflation well beyond GDP growth rate.  Seguchi noted that between 
1985 and 1987, real estate prices in Tokyo rose 300 percent; 
meanwhile, annual real GDP growth over the same period was about 5 
to 6 percent. 
 
RANDT