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RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
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UNCLAS SECTION 01 OF 03 BEIJING 001671 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PGOV EAGR SOCI CH
SUBJECT: PRICES STILL RISING BUT PROVINCES REMAIN CALM 
 
REF: (A) Beijing 870 
 
(B) Beijing 573 
(C) 07 Beijing 7554 
 
SUMMARY 
------- 
 
¶1. (SBU) Commenting on inflationary trends in their respective 
localities, government officials and citizens in two provinces 
outside Beijing recently expressed optimism that prices are 
stabilizing and said their regions have not so far experienced 
widespread social unrest or hoarding.  Their comments followed the 
April 16 announcement by China's National Bureau of Statistics (NBS) 
that the Consumer Price Index (CPI) increased 8 percent in the first 
quarter of 2008, well above the Central Government's stated goal of 
containing inflation at 4.8 percent this year.  According to the 
national figures, inflation remains largely the result of rising 
domestic food prices, which were up 21 percent in Q1, and the 
Central Government continues to provide subsidies to enable 
low-income urban residents to purchase meat.  Experts in the two 
provinces we visited acknowledge, however, that there remain 
long-term structural concerns that threaten to apply upward pressure 
on prices.  END SUMMARY. 
 
CPI SURGE CONTINUES IN 1ST QUARTER 
---------------------------------- 
 
¶2. (SBU) China's first quarter economic statistics showed signs of 
slowing with GDP growth at 10.6 percent year-on-year (down from 11.7 
percent in the first quarter of 2007) along with falling growth 
rates for exports, industry profit growth, the trade surplus, and 
both broad and narrow monetary aggregates.  However, NBS statistics 
show that consumer prices continued their upward climb with the CPI 
rising 8 percent for the first quarter and 8.3 percent y-on-y in 
March (after reaching an 11-year high of 8.7 percent in February). 
By contrast, CPI growth in the first quarter of 2007 was only 2.7 
percent.  Food prices rose 21 percent in the first quarter, 
continuing to account for the bulk of the overall consumer price 
increase.  The housing component of the CPI increased 6.6 percent. 
 
 
¶3. (SBU) Public commentary on the first quarter figures indicated 
there is a broad consensus among analysts and economic officials 
that the Central Government will not meet its stated goal of 
containing inflation at 4.8 percent in 2008, which was announced 
during the March session of the National People's Congress.  Tang 
Min, Deputy Secretary General of the China Development Research 
Foundation, told Emboffs on April 3 that he remains concerned that 
prices will continue to rise, particularly given growing pressure 
from higher international grain and soybean prices. 
 
THE GOVERNMENT'S COUNTERMEASURES 
-------------------------------- 
 
¶4. (SBU) China's State Council introduced ten new measures to 
strengthen support for the rural sector on March 27, including the 
National Development Reform Commission's announcement of a rise in 
the minimum procurement prices for rice and wheat.  Announcing the 
measures at the State Council meeting, Premier Wen Jiabao reportedly 
pledged RMB 25.2 billion (USD 3.6 billion) in budget support for the 
rural sector in addition to the RMB 562.5 billion (USD 80.3 billion) 
already planned in the 2008 budget, as the Central Government aims 
to stimulate agricultural production and combat high food prices by 
boosting supply. 
 
¶5. (SBU) With a view towards social stability, the Central 
Government and local governments also have provided subsidies to 
enable low-income urban residents to purchase meat during the past 
several months.  Contacts in Beijing and the provinces said they 
believe these measures have been more successful and less disruptive 
to the economy than administrative price ceilings would have been. 
 
ALL QUIET IN THE PROVINCES 
-------------------------- 
 
¶6. (SBU) Econoff traveled to Changsha, Hunan's Provincial Capital 
April 22-23, and Shijiazhuang, Hebei's Provincial Capital on April 
16-17 to solicit views on inflation and its impact on social 
stability.  Contacts in Hunan and Hebei -- where consumer prices 
have risen 7.4 percent and 8.2 percent respectively in the first 
quarter compared to a year earlier -- uniformly said there have been 
no cases of social unrest or hoarding due to rising prices in their 
provinces.  The primary area of concern for social stability, 
according to provincial contacts, remains the urban poor, who 
already spend a high proportion of their income on food and are thus 
 
BEIJING 00001671  002 OF 003 
 
 
adversely affected by escalating prices for meat and edible oils. 
Wang Liugen, Director of the Finance Department in the Hebei 
Provincial Financial Securities Working Leading Group Office, noted 
that 87 percent of Hebei's inflation is from food prices, and 
Hebei's provincial government is especially focused on providing 
subsidies to poor urban residents to compensate for the price 
increases. 
 
FARMERS BENEFITING FROM RISING FOOD PRICES 
------------------------------------------ 
 
¶7. (SBU) Provincial contacts also expressed optimism that prices are 
stabilizing, adding that farmers have benefited from higher food 
prices to date.  Peng Jianqiang, Director of the Rural Economic 
Institute at the Hebei Academy of Social Sciences stated that he is 
not too worried about food price increases because the domestic 
price surge has been the result of a natural supply shortage 
(especially of pork) that will correct itself in the near-term. 
Prices have attracted negative media attention in cities, Peng said, 
only because the prices of pork, grains, and edible oils all have 
increased at the same time (rising 63 percent, 6 percent, and 43 
percent respectively nationally in the first quarter compared to a 
year earlier). 
 
¶8. (SBU) In the meantime, Peng claimed, higher food prices are 
boosting per capita rural cash incomes, which increased 18.5 percent 
nationally in the first quarter of 2008 compared to a year earlier 
(see also Re A).  Farmers on the outskirts of Changsha in Hnan 
Province confirmed that their agricultural income has increased 
rapidly in the last year.  In particular, a pig farmer told Econoff 
on April 22 that his income from raising pigs increased four-fold 
between 2006 and 2007 due to higher pork prices.  (According to 
national data, per capita rural cash income from the sale of all 
animal products increased 30 percent in the first quarter of 2008 
compared to a year earlier.) 
 
¶9. (SBU) NOTE:  Local government officials and farmers in both 
provinces all said, however, that rural income gains are partially 
off-set by rising input costs.  In Hunan Province, for example, 
officials at the Provincial Agriculture Bureau said fertilizer costs 
increased 30 percent in 2007.  A local flower and vegetable farmer 
outside Changsha said his living standard is improving because of 
higher prices, but rising costs definitely are cutting into gains 
(Ref B).  END NOTE. 
 
CONFRONTING LONG-TERM PROBLEMS 
------------------------------ 
 
¶10. (SBU) Provincial contacts stated that while they are confident 
prices will stabilize soon, they remain concerned about long-term 
structural weaknesses in the economy that may exacerbate inflation. 
Ma Guohui, Deputy Director General of the China National Hybrid Rice 
Research and Development Center in Changsha, summarized the 
concerns, stating that in China: 
 
(1) Small-scale farming is inefficient and slow to respond to supply 
shocks in the domestic economy; 
 
(2) Industrial production costs are rising, which is driving up 
wages and creating an inflationary cycle; and 
 
(3) Rising international prices are starting to affect the domestic 
inflation situation. 
 
Ma echoed the call by his organization's leader, Dr. Yuan Longping 
(known in China as the "Father of Hybrid Rice"), to focus more 
attention on agricultural technology in order to increase yields and 
meet growing demand. 
 
COMMENT:  STABLE FOR NOW 
------------------------ 
 
¶11. (SBU) Looking at government statistics as well as comments by 
private analysts, the conventional wisdom -- first reported at the 
end of 2007 (Ref C) -- that CPI inflation will come in between 6 and 
8 percent this year, and is in little danger of spiraling out of 
control, appears to be holding.  Our visits to Hebei and Hunan 
reinforce the impression of continued social stability despite price 
hikes as incomes grew even faster.  That being said, the government 
will continue to monitor the impact of higher prices on the urban 
poor and will pay close attention to rising input costs in the 
countryside as it attempts to manage the higher expectations of a 
population now accustomed to rapid real income growth. 
 
APPENDIX:  LOCAL VIEWS FROM HUNAN AND HEBEI 
 
BEIJING 00001671  003 OF 003 
 
 
------------------------------------------- 
 
¶12. (SBU) In Changsha, Hunan Province, Econoff met with officials at 
the Hunan Provincial Agriculture Bureau, Hunan Academy of Social 
Sciences and National Hybrid Rice Research and Development Center as 
well as with farmers on the outskirts of the city.  In Shijiazhuang, 
Hebei Province, Econoff met with officials from Hebei's Finance 
Bureau, Education Bureau, and Academy of Social Sciences.  In both 
provinces, Econoff and Econ Assistant also interviewed average 
citizens about their personal views on rising prices.  A sampling of 
those views is provided below: 
 
--Engineer at the State Electricity Company, Beijing-Shijiazhuang 
train--electricity prices unchanged, but Shijiazhuang residents 
continue to be worried about increasing food prices. 
 
--Grocery store clerk, Shijiazhuang--the price of food oils started 
increasing significantly after Chinese New Year in February, but 
otherwise, price increases have not been too severe. 
 
--Migrant farmer from Henan Province, Shijiazhuang--selling walnuts 
in city and will return home at grain harvest time.  Income has been 
pretty good because of food price increases, especially from 
grains. 
 
--Hebei Provincial Foreign Affairs Officer, Shijiazhuang--restaurant 
prices going up but not that big of a deal.  He and his wife (they 
also have a 10-month-old daughter) do not want to hire a housekeeper 
because it would be too expensive. 
 
--Tour guide, Bailin Temple, Zhao County, Hebei Province--not much 
tourism during the week, but historic sites continue to draw heavy 
crowds on the weekends. 
 
--Taxi driver, Changsha--spends money as soon as she earns it and 
doesn't "worry about tomorrow."  Has noticed price increases but not 
concerned enough to change spending behaviors. 
 
--Hunan Foreign Affairs Officer, Changsha--definitely have noticed 
rising housing prices in Changsha, but food prices seem to be a 
relatively minor issue. 
 
--Flower and vegetable farmer, Xinjiang Village, Changsha 
County--food price increases have been good for farmers, and he 
lives comfortably, renting 80 mu in addition to the four mu he owns. 
 Hunan residents also recognize the pace of food price increases has 
not exceeded that of income increases. 
 
--Pig farmer, Xinjiang Village, Changsha County--income has 
increased four-fold since 2006 because of higher pork prices.  Hopes 
prices will remain high, but he does not want prices to increase 
further as that might attract new entrants into the market and 
suppress prices in the long-run.  He added that he has done well 
because Blue Ear disease broke out in Sichuan Province but did not 
affect pigs in Hunan Province.