VZCZCXRO1857
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0693/01 0761609
ZNR UUUUU ZZH
O 171609Z MAR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2930
INFO RHEHNSC/NSC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHRC/DEPT OF AGRICULTURE WASHDC IMMEDIATE
RUEHOO/CHINA POSTS COLLECTIVE
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 03 BEIJING 000693 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USDA/ERS 
STATE PASS USDA/FAS/OSTA CHINA DESK 
STATE PASS USTR FOR STRATFORD 
TREASURY FOR OASIA 
 
E.O. 12958:  N/A 
TAGS: ECON EAGR CH
SUBJECT: CHINA/DOMESTIC DEMAND: DON'T BET ON RURAL 
CONSUMERS YET 
 
Refs: A. Beijing 580, Beijing 589, Beijing 649 
 ¶B. Beijing 583 
 ¶C. Beijing 590 
 ¶D. Beijing 614 
 ¶E. 08 Beijing 4100 
 ¶F. Shanghai 119 
 
(U) This cable is Sensitive but Unclassified. 
Please protect accordingly. 
 
¶1. (SBU) Summary:  Slumping rural income growth due 
to both lower agricultural prices and remittances, 
and a still-inadequate rural social safety net 
hamper Chinese Government efforts to boost rural 
consumption.  Consumer spending coupons and rebates 
have had only a limited impact.  Despite an emphasis 
on "livelihood" issues and domestic-demand-led 
growth at the March 5-13 National People's Congress 
(NPC), efforts to maintain economic growth will 
likely continue to rely mainly on state-led 
investment.  End Summary. 
 
Government Focuses on Boosting Consumption 
------------------------------------------ 
 
¶2. (SBU) This year's NPC focused on achieving 8 
percent growth in 2009 as well as rebalancing 
China's economy by relying less on investment and 
exports and more on domestic consumption, 
particularly private consumption (Ref A). 
Reflecting long-standing concerns about China's 
growth model, Premier Wen Jiabao's Government Work 
Report stated that China "needs to vigorously expand 
domestic demand, particularly consumer demand." 
Ministry of Agriculture (MoA) public documents 
stated that "rural areas have the greatest potential 
for expanding domestic demand" and that "the focus 
for ensuring improved livelihoods ... is on 
farmers." 
 
Government is Acting 
-------------------- 
 
¶3. (SBU) To address the need to boost consumption in 
the near term, Wen's Work Report said the Government 
will "promptly work out and introduce policies and 
measures to encourage consumption and vigorously 
develop consumer credit" and make home appliances, 
agricultural machinery, and automobiles and 
motorbikes affordable to rural residents.  The 
Government has implemented "Appliances to the 
Countryside" programs (see Ref B) and according to 
Ministry of Commerce (MOFCOM) Beijing will provide 
20 billion yuan (almost USD 3 billion) in subsidies 
in 2009 to boost appliance sales in rural areas.  On 
March 12, an official said that MoA will expand 
existing subsidy programs to boost farm equipment 
purchases, which he argued are important not only to 
boosting agriculture productivity, but also because 
farm machinery sales and repair provide off-farm 
employment.  Local governments are also providing 
consumer spending coupons to targeted rural and low- 
income residents (see Ref C), although it is 
doubtful the Central Government will make this a 
nationwide policy. 
 
But Lagging Rural Incomes Pose Challenge 
---------------------------------------- 
 
¶4. (SBU) Vice Minister of Agriculture Wei Chao'an 
said in a March 12 press conference on the margins 
of the NPC that although farmers are key to boosting 
domestic demand, "farmers' situation also makes this 
difficult."  Wei admitted that it would be difficult 
to maintain the growth of real per capita rural 
incomes in 2009 at the same six to eight percent 
levels achieved over the previous five years. (Note: 
real per capita rural income growth was eight 
percent in 2008. End Note.)  According to Wei the 
difficulties are the result of the global financial 
 
BEIJING 00000693  002 OF 003 
 
 
crisis, which is causing lower agricultural 
commodity prices, weaker agricultural exports, a 
tough business environment for non-farm rural 
enterprises, and job losses among migrant workers. 
(Comment: According to official data around half of 
rural incomes are derived from off-farm work.  It is 
unlikely that new jobs in government-backed 
infrastructure projects will fully offset 
unemployment resulting from slowdowns in the labor- 
intensive exporting and property sectors.  The 
People's Bank of China's Quarterly Monetary Policy 
Report stated that rural spending is more sensitive 
to both positive and negative changes in income. 
End Comment.) 
 
And Changing Spending Behavior Takes Time 
----------------------------------------- 
 
¶5. (SBU) Consumer retail spending numbers in China 
have held up relatively well; retail sales increased 
15 percent in January and February over the same 
period last year.  This increase, however, is much 
lower than in recent years and was pumped up by 
government purchases.  Also, the rate of retail 
sales growth is slowing when viewed on a month-to- 
month basis.  The real impact of the downturn on 
consumption growth could be seen most clearly in the 
appliance sales figures, which increased less than 3 
percent despite the plethora of programs designed to 
spur spending in this sector.  World Bank China 
Country Director David Dollar and other economists 
point out that a near term private consumption boost 
to the economy is unlikely.  According to a March 13 
blog article by Dollar, "consumption habits are not 
going to change overnight." (See also Ref D) 
 
¶6. (SBU) Xiao Geng, a macroeconomist and Director of 
the Brookings-Tsinghua Center for Public Policy in 
Beijing, claims consumption is unlikely to account 
for a larger share of economic growth given current 
circumstances.  In a February 18 meeting with 
Econoffs Geng noted that individuals still need to 
save money for healthcare and their children's 
education, and individuals earn little from their 
financial assets because of the still undeveloped 
financial system, which both leads to high 
precautionary savings as households are forced to 
self-insure and contributes to a growth of household 
income which has lagged behind broader economic 
growth.  Xiao said the financial system as well as 
the pension, education, and healthcare systems will 
only improve gradually.  Land experts such as Li 
Ping from the Rural Development Institute also point 
out that slow progress toward privatizing rural land 
also hampers rural consumption (Ref E).  The PBOC 
noted in its Quarterly Monetary Policy Report that, 
because of the weak social safety net and other 
factors, since 2002 consumption spending of both 
urban and rural households has become less 
responsive to changes in income.  (See also Ref F) 
 
¶7. (SBU) Xiao also commented that consumer spending 
coupons and rebates may not work well because 
consumers will offset spending using coupons or 
other incentive programs with other spending, thus 
maintaining the same overall level of spending and 
savings.  Other contacts point out that many 
consumers will find ways to turn consumer spending 
coupons into cash through black market schemes and 
then save the cash. 
 
Comment: Rural Consumption Won't Save China 
------------------------------------------- 
 
¶8. (SBU) Beijing is clearly committed to increasing 
rural incomes and consumption, but this is a long- 
term project that will take years to bear fruit. 
With their high sensitivity to income effects, rural 
residents are likely to reduce spending during an 
economic downturn, especially one likely to impact 
 
BEIJING 00000693  003 OF 003 
 
 
migrant labor employment prospects.  China's efforts 
to boost rural consumption through ad hoc subsidies 
and incentives may have some impact on the margins, 
but cannot overcome the larger effect of rising 
uncertainty and declining incomes.  Over the next 
few years, China will have to look elsewhere for 
economic engines to pull domestic growth. 
 
 
PICCUTA