VZCZCXRO7522
RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3257/01 2380207
ZNR UUUUU ZZH
R 250207Z AUG 08 ZDS
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 9486
INFO RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 03 BEIJING 003257 
 
C O R R E C T E D C O P Y//PARA 9 & 14 MARKING// 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN WTRO ENRG EAGR CH
SUBJECT: Party Economist Looks to Control Prices, 
Growth; Offers opinion on Doha 
 
Ref: Internal note 8/5/08 
 
BEIJING 00003257  001.3 OF 003 
 
 
¶1. (SBU) Summary: Economic M/C met with Senior 
Communist Party Economist Zheng Xinli to discuss 
current economic issues.  Zheng noted that the 
declining dollar was eroding the value of China's 
dollar-denominated assets.  He thought China's 
inflation was the result of externalities such as 
rising international agricultural and oil prices, 
suggesting China should allow prices to rise only 
slowly and should protect domestic pork and edible oil 
producers while limiting foreign investment.  Zheng 
felt comfortable with slower growth, particularly if 
it implied a rebalancing of the domestic economy. 
Offering his opinion on Doha, Zheng thought that China 
had supported India for political reasons, and that 
China's agricultural sector was already open. End 
summary. 
 
¶2. (SBU) Econ M/C met with Chinese Communist Party 
Central Policy Research Office Vice Minister Zheng 
Xinli to discuss current economic issues.  (Note: 
Zheng is number two at the CPC CPRO, the party's 
internal think tank.  He directly advises the party 
leadership on economic issues.  End note.) Covering a 
wide range of economic topics, Zheng speculated about 
the impact of global economic factors on the Chinese 
economy. 
 
Depreciating Dollar, Sub-prime Crisis 
------------------------------------ 
 
¶3. (SBU) Zheng said that the depreciating dollar was eating 
away at the value of USD assets held by China.  He noted, 
with a smile, that Xia Bin's suggestion that China sell USD 
assets had "even attracted the U.S. President's attention." 
(Note: In October 2007, State Council Development Research 
Center Institute of Financial Research Director Xia Bin was 
quoted as saying that if the United States imposed trade 
sanctions on China, Beijing should not rule out using 
foreign reserves as a "bargaining chip" in talks with the 
United States. End note.) (Comment. It is questionable 
whether reports of Xia's comments were accurate. CASS 
economist He Fan had also been mentioned in the same report 
as having made similar comments. When Emboffs met He 
subsequently to clarify what he had said, he claimed he had 
been misquoted. Econ M/C noted this fact in replying to 
Zheng. End comment.) 
 
¶4. (SBU) Zheng blamed slowing Chinese export growth on the 
U.S. sub-prime mortgage crisis, which he attributed to 
excessive U.S. deregulation and over reliance on markets 
resulting from the repeal of the Glass-Steagell Act.  Zheng 
criticized Congressional pressure on China, saying the 
Congress should listen to the "large number" of prominent 
U.S. economists, for example Joseph Stiglitz, who have 
argued for a less confrontational approach. 
 
Controlling Rising Prices 
------------------------- 
 
¶5. (SBU) Moving on to inflation, Zheng noted that China had 
raised the price of oil products 18 percent this year, 
lifting CPI by one percent annually.  Still, China's 
gasoline prices--at only 60 percent of U.S. prices--remain 
well below the norm in developed countries.  He stated oil, 
grain, and steel products all faced price pressure, but 
thought prices should be adjusted gradually over several 
years in order to make the increases more "affordable." 
(Note: DRC's Xia Bin recently offered similar suggestions 
in the Chinese media.  End note.)  Zheng, however, also 
commented favorably on recent adjustments to domestic 
energy prices, and said prices should be further adjusted 
to eventually reflect global market prices. 
 
¶6.  (SBU) Zheng said that this round ofinflation was 
caused by a surge in agricultural prices such as pork and 
edible oils, and not by excess liquidity.  As a result, he 
objected to the idea that tighter monetary policy would 
reduce inflation.  He thought looser credit and export 
rebates would help small- and medium-sized enterprises.  He 
also suggested limiting investment and encouraging 
consumption to spur domestic demand. 
 
Pork and Oil Protection 
----------------------- 
 
¶7. (SBU) Zheng strongly disagreed with the suggestion that 
blue ear disease had caused a pork shortage, stating that 
the Ministry of Agriculture had made up the excuse to 
 
BEIJING 00003257  002.5 OF 003 
 
 
"shirk their responsibilities."  Pork prices have now 
declined for eight consecutive months, causing Zheng to 
worry that they were declining too quickly.  He proposed a 
"price protection system" and controlled imports to protect 
pig farmers and pork producers. 
 
¶8. (SBU) Likewise, Zheng said that 62 percent of 
edible oil was imported and 70 percent of domestic 
production was by foreign-invested companies that 
imported oil crops from their home countries.  He 
attributed China's relatively high domestic edible oil 
prices to this dependence on foreign producers-- 
mentioning Cargill by name.  He called for China to 
increase its edible oil self-sufficiency to curb 
prices, and noted that as a factor in the decision to 
add edible oil production to the restricted list in 
the investment catalog in order to limit foreign 
ownership. 
 
Export Controls 
--------------- 
 
¶9.  (SBU) Zheng noted that U.S. efforts to block Chinese 
acquisition of advanced technology would fail, since China 
can source these products from other countries or develop 
the technology indigenously.  He added that efforts to do 
so will only hurt U.S. exports and employment. 
 
Future Growth 
------------- 
 
¶10. (SBU) Zheng said China's GDP should grow more slowly, 
at about 9 percent a year.  He was pleased that China's 
economy was rebalancing, with middle and western provinces 
growing faster than the coast; heavy industry growing 
faster than light industry; private enterprises growing 
faster than state-owned enterprises; and agriculture sector 
investment growing faster than industry and service sector 
investment.  He reported that fiscal revenue was rising and 
the trade surplus was declining. (Comment. While it is true 
that, at the moment, many of the inland provinces and non- 
manufacturing sectors are growing relatively quickly, this 
is more likely due to a cyclical downturn in exports and 
construction than serious rebalancing of China's economic 
structure. End comment.) 
 
Doha 
---- 
 
¶11. (SBU) Zheng said the United States should criticize 
India instead of China for failing to reach agreement on 
opening agriculture markets.  He said China supported India 
because of "political and other concerns."  He repeated 
several times that China still has a low per-capita income, 
and as a developing country could not possibly have split 
with India on this issue.  He claimed that China has a more 
open agriculture market than many countries, and imports 
huge quantities of soybeans and cotton every year.  That 
said, he stated China should not open its grain market. 
 
Comment 
------- 
 
¶12. (SBU) By virtue of his position and his opinions, Zheng 
Xinli is very influential within the Chinese policymaking 
community.  During the recent debate over whether China 
should maintain its current monetary policy stance--which 
the Chinese characterize as "tight," but which by many 
normal economic standards is still fairly loose--to manage 
inflation or should increase credit to hurting exporters 
and developers, Zheng argued for taking a middle road with 
targeted fiscal measures but continued credit quotas.  He 
noted there are two diametrically opposed schools of 
thought on this issue, one led by former CASS economist Liu 
Guoguang which opposes monetary easing, and a second 
represented by former Beijing University Economics 
Professor and CPPC member Li Yining which argues that China 
has already entered a period of disinflation. 
 
¶13. (SBU)  Zheng is a strong proponent of economic 
restructuring aimed at spreading the benefit of China's 
economic growth to previously disadvantaged segments of the 
country.  Zheng also oversees an Agricultural Policy 
Institute which has done extensive work on the rural 
economy.  His comments on Doha likely reflect his affinity 
for China's farmers and belief that China's agricultural 
sector is already open to the international market.  His 
views are not unusual within the CPC. 
 
BEIJING 00003257  003.4 OF 003 
 
 
 
Biographical Note 
----------------- 
 
¶14. (SBU) This is our second meeting with Zheng.  The first was 
at adiner hosted by U.S. direct selling company officials 
who were sponsoring Zheng on a visit to the United States 
to investigate the direct selling industry.  Both times, we 
found him accessible and willing to share his opinions 
freely.  This is in contrast to officials from the State 
Council policy office who have consistently turned down our 
requests for appointments, explaining that their unit is 
restricted from meeting foreign contacts. Also attending 
the lunch were the Director of Economic Research Jin (name 
unknown), and Zheng's personal secretary Zhao Zhijie. 
Zheng told us he may be traveling again to the United 
States later this year. 
 
RANDT