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Cablegate: October Price Surge Attracts Attention in Beijing And

VZCZCXRO6255
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #7233/01 3310730
ZNR UUUUU ZZH
P 270730Z NOV 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 3642
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 2045
RUEHFR/AMEMBASSY PARIS 4207
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 007233

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV ETRD EINV CH
SUBJECT: OCTOBER PRICE SURGE ATTRACTS ATTENTION IN BEIJING AND
PROVINCES (C-AL7-02027)

REF: BEIJING 6859 AND PREVIOUS

SUMMARY
-------

1. (SBU) Consumer Price Index (CPI) inflation rose to 6.5 percent
year-on-year in October, tying with August's 11-year high, further
exacerbating a major leadership concern (reftels). Food prices
remain the primary contributor to price increases, as core inflation
was low at 1.1 percent. Officials in both Beijing and the provinces
sought to reassure consumers that the government is taking necessary
measures to control prices, particularly in the wake of a stampede
at a supermarket in Chongqing. The media prominently covered
Premier Wen Jiabao's visit to a wholesale market, and officials in
Henan Province told Econoff that local policies are focusing on
stabilizing prices for pork and edible oils. Wen also warned on
November 20 that structural inflation pressure could develop into
across-the-board inflation. Economic analysts are divided about
what will happen next in China's inflation story. Many investment
bankers continue to assess the problem as a short-term phenomenon
limited to food prices, but others characterize inflation as a
broader issue. Meanwhile, property price increases in October also
attracted attention from analysts and government officials. END
SUMMARY

OCTOBER FIGURES SHOW PRICE SPIKE CONTINUING
-------------------------------------------

2. (U) CPI inflation hit 6.5 percent year-on-year in October
following a slight dip to 6.2 percent in September. The 6.5 percent
mark tied an 11-year high first set in August. Food accounted for
89 percent of the overall CPI increase, and non-food CPI increased
only 1.1 percent. Pork prices rose by 55 percent in October as
China continues to struggle from a short-term pork supply shock.
Vegetable prices rose by 29.9 percent and eggs by 14.3 percent.

3. (U) Price increases grabbed front page headlines in early
November after a sale on cooking oil in a Chongqing Carrefour led to
a stampede that killed three people and injured 31. Chinese and
Western media reported that there also were 15 injuries in a similar
incident at a Tesco market in Shanghai in October. (Note:
Stampedes at supermarkets also have occurred in the past when
inflation was not as high. End Note.)

CONCERN IN BEIJING AND PROVINCES ABOUT RISING PRICES
--------------------------------------------- -------

4. (U) The media prominently covered Premier Wen Jiabao's recent
visit to a wholesale market where he reassured low-income families
that the government would adopt necessary measures to combat
inflation. Wen has consistently expressed concern about rising
consumer prices since May (reftels), underlining the Central
Government's concerns about the link between inflation and social
stability.

5. (SBU) In Central China's Henan Province, an official from the
Provincial Development and Reform Commission said that inflation is
not yet a serious economic problem, but he agreed that inflation is
a social stability concern and local authorities therefore cannot
afford to ignore it. Other Henan officials added that there is
growing concern about the rising price of edible oils.

6. (SBU) An economic policymaker in Henan's Kaifeng Municipality
said the local government would continue to mitigate the food
inflation problem through a two-track rural-urban subsidy solution
by: (1) providing insurance to farmers to encourage them to raise
pigs and (2) giving RMB 15 (USD 2) per month to low-income families
in urban areas to offset rising prices. The official said subsidies
would continue until at least the end of the year.

PREMIER SAYS THERE'S MORE REASON TO BE CONCERNED
--------------------------------------------- ---

7. (SBU) At the ASEAN Summit in Singapore on November 20, Premier
Wen warned that sector specific inflation pressure could develop
into across-the-board inflation, signaling the government's mounting
concern that food inflation could spill over into non-food
inflation. As a result, the upcoming Central Economic Work
Conference -- the Central Government's annual meeting on economic
issues -- reportedly will focus on inflation and possible monetary
and fiscal policy responses.

INVESTMENT BANKS DIVIDED ON WHAT COMES NEXT
-------------------------------------------

BEIJING 00007233 002 OF 002

8. (U) Investment bank reports offered a wide range of views on
China's inflation problem. CLSA Asia-Pacific Markets, for example,
offered the conventional view that inflation is a short-term food
price problem and not a reason for the government or public to
panic. Similarly, a recent report by JP Morgan focused on the low
rate of core inflation at 1.1 percent year-on-year in October.

9. (U) Morgan Stanley, however, issued a more alarmist statement,
saying that "the risk that inflation in China is out of control has
risen meaningfully." In addition, analysts from Goldman Sachs said
at a recent conference that they see inflation as a broader issue
related in part to money supply (thus more persistent) and joined
with other economic imbalances.

PROPERTY PRICES RISING FAST
---------------------------

10. (SBU) Property price increases in October also attracted
attention from policymakers. According to a National Development
and Reform Commission (NDRC) survey, the real estate price in 70
cities increased by 9.5 percent during the month, with Beijing's
housing price up by 17.8 percent. A Beijing-based economic analyst
said that containing property price increases will be the main
macroeconomic challenge for the government next year with property
prices likely to rise by 12 to 15 percent in the first quarter of
2008.

RANDT

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