VZCZCXRO6715
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #6286/01 2680718
ZNR UUUUU ZZH
P 250718Z SEP 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 2187
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
UNCLAS SECTION 01 OF 02 BEIJING 006286
SIPDIS
SENSITIVE
SIPDIS
STATE FOR EAP/CM
STATE PASS USTR
TREASURY FOR OASIA/DOHNER
COMMERCE FOR 4420
E.O. 12958: N/A
TAGS: ECON EFIN ETRD ELAB PGOV CH
SUBJECT: PARTY CONGRESS ECONOMIC POLICY IMPACT SEEN AS
LIMITED, BUT INFLATION REMAINS A POLITICAL CONCERN
REF: A. BEIJING 5578
B. BEIJING 5627
SUMMARY
-------
1. (SBU) Several ECON contacts have told us that next month's
Party Congress is unlikely to affect China's macroeconomic
policies. One economic analyst opined that personnel changes
at the Ministry of Finance could play a role in China's
fiscal policy, but said the overall direction of reform would
remain unchanged. All who we spoke to agreed, however, that
inflation is no longer just an economic issue; it is
increasingly becoming a political concern. They see recent
government statements and actions on inflation as made with
an eye towards the Party Congress. Investment bank research
reports also support this view. END SUMMARY.
NDRC on the Sidelines
---------------------
2. (SBU) A research economist at the National Development
Reform Commission (NDRC) said that China's top economic
policymaking body has little involvement with preparations
for the Party Congress (in contrast to more extensive
involvement with the March National People's Congress, or
NPC). The contact believes that personnel changes will not
affect the direction of China's economic reforms and expects
no significant economic policy changes to result from the
Congress. It will be more interesting to watch the March
2008 session of the NPC -- the first NPC session after the
Party's leaders have assumed their new positions, according
to this contact.
Economists Are Not "Reading the Tea Leaves"
-------------------------------------------
3. (SBU) A locally-based private sector economist echoed the
NDRC contact's position that the Party Congress would not
affect economic policy, suggesting that economists have shown
little interest in "reading the tea leaves" prior to the
Party Congress because there is uniform agreement that
economic policies will remain unchanged. The only possible
exception is fiscal policy under new leadership at the
Ministry of Finance. Economists are therefore interested in
personnel changes at MOF and are watching to see if China
will pursue a more aggressive fiscal policy in 2008.
Inflation a Growing Political Concern
-------------------------------------
4. (SBU) Giving remarks at an Embassy-hosted conference on
September 18, Wang Tongsan, Director of the Institute of
Quantitative and Technical Economics at the Chinese Academy
of Social Sciences, reiterated his position (Ref A) that
inflation is a growing political concern for China's
leadership, especially as the Party Congress approaches.
Referring to the news that the Consumer Price Index (CPI) had
increased 6.5 percent year-on-year in August, the most rapid
pace in ten years, Wang said that there are two schools of
thought within the government about the dangers of inflation.
One view, held by the NDRC and the National Bureau of
Statistics, is that the spike is limited to food price shocks
and thus temporary. Wang said, however, that he is more
inclined to agree with the People's Bank of China (PBOC),
which has stated that recent inflationary trends could spark
expectations of further price hikes and thus push up wage
rates and core inflation items, leading to a more serious
problem.
5. (SBU) A contact at the State Council's Development
Research Center (DRC) added that nearly all of his time
recently has been devoted to researching the food inflation
problem, which has been the primary contributor to China's
recent price spike. The DRC believes the problem will be
short-lived, but the contact said the leadership is very
concerned.
Taking Steps to Counter Inflation
---------------------------------
6. (U) With the Party Congress less than a month away, the
government has taken more steps recently to bring inflation
BEIJING 00006286 002 OF 002
under control. The Ministry of Commerce (MOFCOM) announced
on September 18 that a recent survey indicated that the CPI
would increase by more than four percent for the year in 2007
after three consecutive years at 1.5 percent. The survey
also reported that prices are beginning to rise not only for
food products but also for clothing. The general population
is noticing the changes: the latest quarterly PBOC survey
covering 50 cities found that 47.1 percent of respondents
believe prices are too high, a sharp increase from the 29.5
percent figure from the previous quarter.
7. (U) The government has also frozen prices it controls for
the remainder of the year, a move widely assumed to be aimed
at promoting stability during the upcoming holidays
(Mid-Autumn Festival and National Day) and Party Congress.
Six ministries issued a statement that local governments are
not allowed to raise prices without the NDRC's approval.
PRIVATE ECONOMISTS SEE IT THE SAME WAY
--------------------------------------
8. (U) RBS Emerging Markets Strategist Ben Simpfendorfer
suggested in a research note that the recent flurry of policy
activity surrounding inflation exaggerates the immediate
danger and is instead tilted towards placating public opinion
ahead of the Party Congress. The price freezes, for example,
apply to goods that are not important drivers of inflation.
CLSA Managing Director Andy Rothman believes the government
understands inflation is presently tied to temporary supply
factors and does not tie the current trends to Party Congress
outcomes. He expects the economic policy aspects of the
Party Congress to focus on emphasizing previously announced
"harmonious society" policies.
Randt