VZCZCXRO1828
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0589/01 0651035
ZNR UUUUU ZZH
O 061035Z MAR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2729
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 04 BEIJING 000589 
 
SENSITIVE 
SIPDIS 
 
STATE FOR E, EAP, EAP/CM 
TREASURY FOR OASIA/DOHNER/WINSHIP 
NSC FOR LOI 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PREL CH HK TW
SUBJECT: NPC PRESS BRIEFING ON CHINA'S ECONOMY BY PBOC, 
NDRC, MOF HEADS 
 
REF: A. BEIJING 0580 
     ¶B. BEIJING 0559 
     ¶C. BEIJING 0531 
 
¶1. (SBU) Summary.  At a March 6 press conference held in 
conjunction with the ongoing National People's Congress 
annual meeting (refs), People's Bank of China (PBOC) Governor 
Zhou Xiaochuan, Minister of Finance (MOF) Xie Xuren, and 
National Development and Reform Commission (NDRC) Chairman 
Zhang Ping addressed the following issues: 
 
-- Macro-economy: The primary objective is to ensure steady 
and relatively fast GDP growth by boosting domestic demand, 
reinvigorating industries, and improving social welfare. 
Some economic indicators are beginning to show signs of 
recovery. 
 
-- Budget: 2009 central government spending on health, 
education, social security, housing, and other social welfare 
categories will increase 29 percent to RMB 728.5 billion (USD 
106 billion). 
 
-- Fiscal Policy: Increased government spending, tax reform, 
and other initiatives, together with falling revenue, will 
produce a 2009 fiscal deficit of RMB 950 billion (three 
percent of GDP). 
 
-- Fiscal Stimulus: The RMB four trillion (USD 585 billion) 
fiscal stimulus, funded by the central government (RMB 1.18 
trillion) as well as local governments and non-government 
sources, will focus on improving people's livelihood. 
Inspection agencies will monitor project implementation 
closely to avoid duplication, inefficiency, and waste.  It is 
too soon to tell if more stimulus will be needed. 
 
-- Monetary Policy: The State Council at an early point 
determined that China's policy responses to the global 
financial crisis should be front-loaded and forceful.  Money 
supply targets are guidelines rather than strict limits. 
 
-- SMEs: Lending to small and medium-sized enterprises has 
increased, but many continue to have difficulty obtaining 
credit. 
 
-- Exchange Rate: The government's goal is to maintain a 
stable and balanced equilibrium, and "no further explanation 
is necessary." 
 
-- Hong Kong: The RMB settlement pilot project is proceeding, 
and the currency swap plan was announced to boost confidence 
on both sides of the border. 
 
-- Taiwan: Both sides of the Strait would benefit from 
greater opening in the banking sectors.  End Summary. 
 
¶2. (SBU) The March 6 tripartite press conference, with a 
theme of "meeting the global financial crisis, maintaining 
steady and relatively rapid economic growth," was one of a 
number of such events offered to the media and diplomats 
during the March 5-13 NPC session.  Of the twelve journalists 
chosen to raise questions, about half represented Hong Kong, 
Taiwan, or foreign media organizations.  Unlike the March 4 
NPC preview briefing (ref b), however, some if not most of 
the questions appeared not to be planted, as the ministers 
sometimes replied without reference to their briefing 
materials and appeared nervous at times. 
 
Macro-economy: Has China Hit Bottom? 
------------------------------------ 
¶3. (U) In response to a question from an "Economic Daily" 
reporter of whether the Chinese economy has "hit bottom," 
NDRC Chairman Zhang said dealing with the global crisis was 
the greatest challenge of this century for China.  The 
primary objective is to ensure steady and relatively fast 
(i.e., eight percent) GDP growth by boosting domestic demand, 
reinvigorating industries, improving social welfare and 
security to ease concerns and increase public confidence, and 
mobilizing international support.  The central government had 
identified the problems early and responded swiftly, while 
some other (unnamed) countries had been slow and late.  Zhang 
said some economic indicators are beginning to show signs of 
recovery, and China's long-term strong economic fundamentals 
remain unchanged. 
 
Budget: From the People, For the People 
 
BEIJING 00000589  002 OF 004 
 
 
--------------------------------------- 
¶4. (U) Asked by a Chinese reporter what measures his ministry 
was taking to improve people's livelihood, MOF Minister Xie 
observed that public finance is taken from the people, so it 
should be used in their interests.  He said 2009 central 
government spending in various public welfare categories 
would total RMB 728.5 billion (USD 106 billion), an increase 
of RMB 165.3 billion (29.4 percent) compared to 2008. 
Spending for education, health and medical care, social 
security, employment, housing, and culture all would register 
double-digit increases, much of it directed to lower income 
people, retirees, and rural residents. 
 
Proactive Fiscal Policy 
----------------------- 
¶5. (U) In response to a query from the Xinhua News Service 
about the government's "proactive" fiscal policy, Minister 
Xie said this policy -- applied in conjunction with moderate 
easing of monetary policy -- includes increased government 
spending in selected areas, tax reform and reductions to 
encourage consumption, income support for low-income people, 
improvements in the social safety net, and commitment of more 
resources to science and technology, energy conservation, and 
environmental improvement.  By reducing tax revenue and 
raising spending, these measures will increase the fiscal 
deficit to RMB 950 billion (about three percent of GDP), 
requiring the government to issue more bonds, which Xie said 
was a necessary and affordable step. 
 
Fiscal Stimulus: Is There Enough Money? 
--------------------------------------- 
¶6. (U) Asked by a Russian journalist whether the government 
would have any difficulty raising enough funds for the 
stimulus projects, and whether provincial leaders were 
lobbying or competing for funding, Chairman Zhang 
distinguished between the RMB 1.18 trillion provided by the 
central government and the roughly RMB three trillion from 
local and non-government sources.  Projects that are 
primarily for public benefit, such as schools, health care, 
and water, will be funded mainly by the central government, 
while semi-public-benefit and primarily commercial-benefit 
projects will need to attract more non-governmental funding. 
Central authorities will support and assist local governments 
through issuance of RMB 200 billion of treasury bonds on 
their behalf, and by providing some low-interest, 
policy-based loans.  Also, implementing agencies for some 
projects that will generate profits in the long term, such as 
power plants and roads, will be permitted to issue corporate 
bonds to meet short-term capital needs; about 45 such bonds 
worth RMB 170 billion have been issued since the fourth 
quarter of last year, with another 50 bonds valued at RMB 150 
billion pending. 
 
¶7. (U) Asked how the government selected projects for 
inclusion in the fiscal stimulus program, and what measures 
would be taken to prevent waste and avoid duplication, NDRC 
Chairman Zhang said increasing investment was the most 
effective and direct means to boost domestic demand.  The 
central government, however, clearly has focused the program 
on investments to improve people's livelihood, such as 
education, housing, health, agriculture, infrastructure, 
energy conservation, and pollution reduction, and not on 
expansion of manufacturing industries already suffering from 
excess capacity.  Approximately three trillion RMB will be 
used in these sectors, with the remaining one trillion 
devoted to post-disaster reconstruction.  Zhang said the 
government will continue to adjust the program and transfer 
funds between sectors as needed.  Also, some parts of the 
separate "ten industrial sector revitalization plans" may be 
incorporated into the four trillion stimulus package. 
 
¶8. (U) To avoid duplication, inefficiency, and waste, Zhang 
said the government has formulated a "one clear and two 
stricts" policy: clearly define the responsible agency for 
each project, then strictly implement and strictly monitor 
and inspect the investments.  To do so, the government has 
established 24 central inspection groups to avoid any misuse 
of funds; thus far, he said no "major violations" of law have 
been detected. 
 
Will there Be Another Stimulus? 
------------------------------- 
¶9. (U) In response to a foreign journalist's question, 
Chairman Zhang said the RMB four trillion fiscal stimulus 
package was a dynamic process.  Officials need to monitor the 
 
BEIJING 00000589  003 OF 004 
 
 
economic situation closely to adjust their policies if needed 
to prevent a slump in growth.  As to whether four trillion 
was enough, he said it is too soon to tell. 
 
Monetary Policy: Front-loaded and Forceful 
------------------------------------------ 
¶10. (U) A "Financial Times" reporter asked Governor Zhou to 
comment on the course of China's monetary policy over the 
past year, from tight in the first half of 2008, to 
"moderately easy" in the second half, and then to the record 
release of new credit (RMB 1.6 trillion) in January 2009. 
Zhou defended the policy changes, taken in response to rapid 
changes in the economic environment, and said the current mix 
of monetary and fiscal policy measures was working and 
starting to bring good effects and upward trends in the data, 
with some January 2009 data "above expectations."  Zhou said 
the State Council early on had determined that China's policy 
responses to the global financial crisis should be 
front-loaded and forceful; if public confidence collapsed, it 
would be too late to act.  He said China had learned this 
lesson by studying the experience of other countries. 
 
"Targets" are Just "Guidelines" 
------------------------------- 
¶11. (U) Noting that new lending through February already 
equaled half of the announced RMB five trillion target for 
the entire year, a Reuters reporter questioned whether this 
would lead to credit shortages later in 2009.  In response, 
Governor Zhou said the PBOC's target was lending above RMB 
five trillion.  After many years of economic reform, the 
various money supply "targets" no longer are truly "planned" 
or compulsory; rather, they are simply guidelines or 
intermediate goals.  The "final" goals for the PBOC are 
prevention of inflation, promotion of economic growth, 
generation of employment, and balance of payments stability. 
Officials needed to assess monetary policy in light of these 
goals.  Furthermore, under the impact of the global crisis, 
the government needs to remain flexible and not blindly apply 
simplistic targets.  Finally, he acknowledged that Chinese 
banks tend to extend more loans in the first half of each 
year, but that does not mean there will be no loans in the 
second half. 
 
SMEs Need Help 
-------------- 
¶12. (U) A China Radio International correspondent asked 
Governor Zhou how the PBOC would assist China's small and 
medium enterprises (SMEs), and also about the problem of 
counterfeit Chinese currency.  Zhou said he was aware that 
many SMEs have complained about credit difficulties, and the 
PBOC had adjusted its policies in the second half of 2008 
accordingly.  As a result, in 2008 lending to SMEs rose 13.5 
percent, and they received 51.9 percent of total lending, 
compared to 48 percent for large companies.  That said, 
however, some problems remain, especially for the smaller 
enterprises with low capital levels.  Zhou said all banks 
need to find ways to assist these companies.  For the 
counterfeit currency issue, Zhou referred the reporter to a 
recent speech by Vice Governor Ma Delun, now posted on the 
PBOC website. 
 
Exchange Rate: Rule Out Depreciation? 
------------------------------------- 
¶13. (U) Asked by a foreign journalist whether he could 
clearly rule out a depreciation of the RMB, Governor Zhou 
replied that Premier Wen Jiabao clearly stated the previous 
day that the RMB exchange rate should be a market-based, 
managed floating rate, with reference to a basket of 
currencies.  The government's goal is to maintain a stable 
and balanced equilibrium, and "no further explanation is 
necessary."  Zhou then added that the global financial crisis 
was affecting policies in all sectors, and said "we must 
wonder what will happen in the country where the crisis 
started."  If you can tell me, he told the journalist, then 
"we can act preemptively." 
 
Hong Kong: Currency Swap and RMB Settlement 
------------------------------------------- 
¶14. (U) A Hong Kong journalist asked about expansion of Hong 
Kong's pilot RMB settlement program and implementation of the 
Hong Kong-Mainland currency swap arrangement.  Governor Zhou 
replied that the settlement pilot program had begun in 2003 
and was gradually being expanded.  For trade in goods, Zhou 
said there were "not many difficulties," as banks simply 
needed to add one more currency to their existing multiple 
 
BEIJING 00000589  004 OF 004 
 
 
currency systems.  Regarding the currency swap arrangement 
with the Hong Kong Monetary Authority, Zhou said announcement 
of the plan was intended to increase public confidence on 
both sides of the border and support recovery from the global 
financial crisis.  It also would be used to deal with any 
sudden liquidity problems. 
 
Cross-Strait Banking 
-------------------- 
¶15. (U) A Taiwan journalist, noting recent improvements in 
cross-Strait relations, inquired whether specific reciprocal 
measures would be taken to further open the banking sectors 
in both Taiwan and the Mainland.  Governor Zhou agreed that 
more improvements in access for banks from both sides were 
needed to facilitate deepening economic and financial 
cooperation.  He cited the development of financial relations 
with Hong Kong as a model; initially little cooperation, 
followed by gradual expansion to satisfy the demands of the 
market. 
PICCUTA