Cablegate: Lower Third Quarter Growth but More Tightening

VZCZCXRO4029
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #2239/01 2921047
ZNR UUUUU ZZH
O 191047Z OCT 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0295
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 022239

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM
USDOC FOR 4420
TREASURY FOR OASIA/CUSHMAN
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTING, ALTMAN
STATE PASS CEA

E.O. 12958: N/A
TAGS: ECON EFIN CH
SUBJECT: LOWER THIRD QUARTER GROWTH BUT MORE TIGHTENING
LIKELY

SUMMARY
-------

1. (SBU) China's year-on-year GDP growth rate, as measured on
a quarterly basis, fell from 11.3 percent in the second
quarter to 10.4 percent in the third quarter, a result in
line with numerous private sector forecasts. The decline
comes in the wake of numerous cooling measures undertaken by
the Central Government in recent months, including hikes in
interest rates and the reserve requirement as well as
administrative measures targeting specific sectors such as
housing and steel. Economic policy makers appear set to
interpret the third quarter result as a sign that recent
efforts to slow the economy are working but should continue.
END SUMMARY.

FALL IN THE GDP GROWTH RATE
---------------------------

2. (U) National Bureau of Statistics (NBS) figures released
on October 19:

GDP Growth Rate (percent, year-on-year)

2005 (Full Year) 10.2

2006 (YTD) 10.7 * released October 19
-- 1Q 10.3
-- 2Q 11.3
-- 3Q 10.4 * released October 19

3. (U) The third quarter result, in line with private sector
forecasts, still indicates a growth rate above that recorded
in 2005. The recent downtrend on a quarterly basis, however,
is significant because it suggests that recent efforts to
cool China's economy may be having some effect. Measures
employed in recent months have included two interest rate
hikes of 27 basis points each, a rise in bank reserve
requirements, and a range of administrative actions aimed at
cooling lending and activity in sectors such as housing and
steel.

4. (U) NBS statistics also show continued low inflation, with
a 1.3 percent year-to-date rate of increase in general
consumer prices.

OTHER SIGNS OF COOLING
----------------------

5. (U) Other recent data show further signs of cooling:

o The widely watched urban fixed asset investment (FAI)
growth rate is on a downward trend over recent months:

2006 Urban Fixed Asset Growth
(percent, year-on-year)

June 34.0
July 27.0
August 21.5
September 23.6

o The money supply (M2) grew at 16.8 percent in September,
its slowest pace in 14 months.

o Value added industrial output growth fell to 15.7 percent
in September from 19.5 percent in August.

REACTION
--------

6. (SBU) Reacting to the growth figures, NBS Spokesman Li
Xiaochao, in a released statement, trumpeted "the good
momentum of steady and fast growth" but referenced a
continued need to enhance "the achievements brought by
macro-regulatory control." Chinese Academy of Social
Sciences Senior Research Fellow Wang Tongshan, who provides
input to government officials on economic policy issues, told
us October 19 that the lower GDP growth rate suggests the
government's macroeconomic tightening measures are showing
results. He said that there is still too much investment and

BEIJING 00022239 002 OF 002

excess liquidity in the economy and predicted sustained
cooling efforts over the next six months.

COMMENT
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7. (SBU) There may be a cooling trend, but the data
supporting it are still young. Some private economists have
pointed out contrary indicators in recent weeks, such as
higher growth rates in power consumption, cement production,
and freight traffic. Consequently, several more months may
be needed to conclude whether recent efforts to calm the
economy have been successful and also whether they have
staying power.
Randt

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