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RR RUEHCN RUEHGH
DE RUEHGH #0026/01 0251059
ZNR UUUUU ZZH
R 251059Z JAN 10
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8504
INFO RUEHBJ/AMEMBASSY BEIJING 3271
RUEHCN/AMCONSUL CHENGDU 2363
RUEHGZ/AMCONSUL GUANGZHOU 0820
RUEHSH/AMCONSUL SHENYANG 2354
RUEHIN/AIT TAIPEI 2152
RUEHHK/AMCONSUL HONG KONG 2535
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 0868
RUEHUL/AMEMBASSY SEOUL 0657
RUEHFR/AMEMBASSY PARIS 0046
RUEHML/AMEMBASSY MANILA 0155
RUEHGH/AMCONSUL SHANGHAI 9171

UNCLAS SECTION 01 OF 03 SHANGHAI 000026 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
NSC FOR MEDEIROS, LOI, SHRIER 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
STATE PASS CEA FOR BLOCK 
STATE PASS CFTC FOR OIA/GORLICK 
MANILA FOR ADB USED 
PARIS FOR US/OECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV CH
SUBJECT: SHANGHAI ECONOMISTS PREDICT RESUMPTION OF GRADUAL RMB 
APPRECIATION 
 
¶1.  (SBU) Summary:   Shanghai economists told visiting Embassy 
Beijing Economic Minister Counselor that the current global 
economic climate has led to Central Government policy paralysis 
on several critical issues, including currency appreciation and 
state-owned enterprise (SOE) reform, as Beijing continues to 
focus its efforts on maintaining economic stability.  In 2010, 
as China's exports return to normal, economists predict that the 
renminbi (RMB) will resume its gradual appreciation to 3-5 
percent/year and that inflation will also rise to 3-5 percent. 
SOE reform will continue to be delayed until a new unforeseen 
crisis forces change.  End Summary. 
 
 
 
=================================== 
 
RMB APPRECIATION MAY RESUME Q2 2010 
 
=================================== 
 
 
 
¶2.  (SBU) In a February 20 roundtable with Embassy Beijing 
Minister Counselor for Economics Bill Weinstein, local academics 
noted that the current global economic climate had led to 
Central Government policy paralysis on several key issues, 
including currency appreciation and SOE reform.  Professor XU 
Mingqi of the Shanghai Academy of Social Sciences, said that the 
Chinese Government realized that the RMB needed to increase in 
value and was looking for a "calm moment" to resume its gradual 
appreciation.  Xu predicted that once China's exports returned 
to "normal" growth rates, possibly as soon as March or April 
2010, the RMB would resume its steady pre-crisis appreciation 
rate of 3-5 percent per year.  (Note:  Xu implied that China's 
export growth average of nearly 28 percent from China's WTO 
entry until 2008 was "normal."  End note.)  Xu stressed that 
there would not be a major one-off adjustment due to the 
negative impact such a move would have on exporters and the 
likelihood that a sudden appreciation would lead to even greater 
inflows of speculative capital.  Professor ZHANG Zehui of the 
China Executive Leadership Academy Pudong (CELAP), was slightly 
more cautious, stressing that RMB appreciation would further 
harm the already battered export sector, making appreciation 
politically difficult. 
 
 
 
============================= 
 
INFLATION 3-5 PERCENT IN 2010 
 
============================= 
 
 
 
¶3.  (SBU) While the economists all believed that inflation as 
measured by China's consumer price index (CPI) will increase 
moderately in 2010, they differed on degree.  Xu emphasized that 
the Central Government viewed growth, not inflation, as its main 
policy target and that, given the uncertain economic climate, 
the PBOC would be reluctant to use extreme monetary tightening 
to bring inflation under control. Therefore, Xu predicted 
inflation would hit 5 percent this year, although, he 
acknowledged this figure was on the high end of the consensus, 
making him a bit of an outlier.  Xu added that rising price 
levels will have the same economic effect as RMB appreciation by 
making Chinese products more expensive overseas, and that the 
 
SHANGHAI 00000026  002 OF 003 
 
 
Chinese leadership therefore prefers to use a combination of 
appreciation and inflation to gradually revalue the RMB. 
Professor XI Junyang of the Shanghai University of Finance and 
Economics, agreed that 2010 would see modest inflationary 
pressures building and predicted that CPI will rise to 3 percent 
in 1H 2010, accelerating to 3-4 percent in the second-half of 
the year.  Xi stressed that China had been through several 
inflationary periods since beginning economic reforms thirty 
years ago and the government had learned its lesson: 
maintaining a stable price level is critical. Professor Xi cited 
the PBOC's January 12, 2010 decision to raise banks' required 
reserve ratios by 0.50 percentage points as proof, adding that 
the move was "beyond [his] expectations." 
 
 
 
¶4.  (SBU) The economists downplayed the likelihood of additional 
stimulus beyond what was previously announced in 2010.  Xu noted 
that in 2009, while the Central Government announced RMB1.5 
trillion in spending on stimulus projects, local governments 
announced as much as 10 times this amount and simply did not 
have the capacity or resources to issue more stimulus this year. 
 The Central Government's current monetary and fiscal tightening 
makes a large additional stimulus program just as unlikely. 
 
 
 
¶5.  (SBU) Professor Xu noted that unemployment in Shanghai, 
while not as much of a high-profile issue as inflation, is also 
a major concern for the municipal government. He stated that 
while the official unemployment rate is 4.3 percent, this does 
not count some groups, such as migrant workers and "laid off" 
(xia gang) industrial workers.  In actuality,  Shanghai's 
unemployment could be as high as 10 percent.  In addition, 
underemployment remains a real concern, particularly among 
recent university graduates who are unable to find decent jobs. 
Xu agreed with the widely-held view that China needs to maintain 
growth rates of 8-9 percent/year in order to create enough new 
jobs to offset large numbers of new entrants into the workforce, 
as many as 10mn/year. 
 
 
 
================ 
 
SOE REFORM DEAD? 
 
================ 
 
 
 
¶6.  (SBU) The economists broadly agreed on the difficulty of 
carrying out SOE reform in the current economic climate. 
According to Xu, reform is not an urgent agenda item because the 
government is completely focused on maintaining economic 
stability, and that, short of a major crisis to catalyze action, 
SOE reform was inconceivable.  Professor Xi agreed, noting that 
all of the easy steps towards reform had already been taken. Xi 
said that in addition to being stuck in an economic environment 
that was not conducive to reform, the government lacked 
incentives:  SOE reform will strip local governments of revenue 
streams and deny local officials important levers of power. 
Nevertheless, over the long term, Xi believed the continuous 
financial drain of thousands of hugely inefficient SOEs on 
government coffers, might force change.  Xi also postulated that 
the government may sell off SOEs as a way to finance social 
security programs. 
 
SHANGHAI 00000026  003 OF 003 
 
 
 
 
 
=========== 
 
REBALANCING 
 
=========== 
 
 
 
¶7.  (SBU) China's ability to rebalance its economy in the coming 
years drew mixed reviews. Current economic uncertainty makes 
bold reform difficult and the threat of a deteriorating trade 
relationship with the United States may galvanize Beijing's 
unwillingness to take additional steps towards rebalancing. 
Professor Xu pointed out that recent safeguards and anti-dumping 
cases had soured prospects for reform, and expressed concern 
that this could be the beginning of a trend, particularly if 
special interest groups in the United States filed additional 
421 special safeguards cases. These actions would almost 
certainly lead to retaliation by China, he said. 
 
 
 
¶8.  (SBU) Specific rebalancing measures, such as the 2009 
program to subsidize the purchase of white-goods in the 
countryside, were not particularly effective, according to 
Professor Zhang.  She stressed that many Chinese were still 
simply too poor to become the type of large-scale consumer that 
could drive GDP growth.  Zhang predicted that consumption would 
remain a minor driver of GDP growth for many years.  Professor 
Xu expected 2010 GDP to be fueled by "40-50 percent investment, 
20 percent exports and 30 percent consumption." 
 
 
 
¶9.  (SBU) Econ MinCoun Weinstein has cleared this cable. 
CAMP