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Cablegate: Inflation, Exacerbated by Snowstorms, Hits a New 11-Year

VZCZCXRO1879
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0580/01 0510023
ZNR UUUUU ZZH
O 200023Z FEB 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5122
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 BEIJING 000580

SIPDIS

SENSITIVE
SIPDIS

FOR EAP/CM AND EEB
USDOC FOR 4420
TREASURY FOR OASIA/ISA DOHNER
STATE PASS USTR -- STRATFORD PASS CEA FOR BLOCK

E.O. 12958: N/A
TAGS: ECON EFIN PGOV CH

SUBJECT: INFLATION, EXACERBATED BY SNOWSTORMS, HITS A NEW 11-YEAR
HIGH

REF: 07 BEIJING 6286

SUMMARY
-------

1. (SBU) China' National Bureau of Statistics announced today that
consumer inflation reached a new eleven-year high of 7.1% in
January. This may well be followed by an even higher figure for
February that would be released on March 11, while the National
People's Congress (NPC) is in session. Once again, agricultural
prices explain most (85%) of the spike, the impact of which is felt
disproportionately in poor and rural areas where families spend more
of their budget on food. The increase came despite price controls
and other price-related measures announced in January. The recent
round of elevated inflation began last July, and economists have
predicted for months that it would soon subside, only to be
surprised at its persistence. There is a risk going forward that
inflationary expectations will take root among consumers, dragging
out the process. END SUMMARY

INFLATION SPIKE CONTINUES
-------------------------

2. (SBU) China's National Bureau of Statistics announced today that
consumer inflation reached a new eleven-year high of 7.1% in
January. Food prices accounted for 85% of the increase; non-food
inflation was 1.5%. Producer prices rose 6.1%, driven by raw
materials and transportation bottlenecks and pointing to possible
further inflation pressures ahead. February figures -- to be
released March 11 during the NPC -- may be even higher because of
snowstorm effects not captured in the January numbers, according to
several economists.
The increase came despite price controls and soft measures announced
in January. The State Council, in an apparent bid to curb inflation
expectations, had announced there would be no price increases for
goods already controlled (e.g., energy and utilities), that large
producers would need approvals to raise food prices, and that
retailers would have to notify authorities if they raised certain
categories of food prices beyond stated thresholds.

SURPASSING EXPECTATIONS
-----------------------

3. (SBU) The persistence of the CPI increases is a surprise. A look
back at predictions from last fall shows major investment bank
economists at outfits like CICC, JP Morgan, and RBS describing the
CPI as at its likely peak. Economists at Chinese think-tanks took a
similar view but placed more emphasis on the danger of fanning
inflationary expectations (reftel). Chinese Government officials,
some speaking on the margins of the 17th Party Congress in October,
also raised the potential for igniting inflationary expectations
(e.g., demand for higher wages that would lead to further
inflation), but gave little attention to the possibility that food
price increases could drag out for this extended period.

EXPECT MORE
-----------

4. (SBU) There are several reasons more inflation-related headlines
are likely in the coming months. Food prices are still rising in
the wake of snowstorm damage. Producer price inflation is also on
the rise, suggesting that energy and raw material prices have yet to
fully play out on the consumer side here. The locally-based Bank of
America economist predicts a 7.8% figure for the February CPI as a
result. Despite ongoing monetary "tightening," the rates of money
supply and credit growth are still very high (e.g., 20-month high
for the money supply increase in January). Finally, the longer that
price hikes are sustained, the greater the risk of inflationary
expectations settling in, leading to secondary effects later on.

RURAL EFFECTS
-------------

5. (SBU) A valued academic economist contact expressed concern to us
today about disproportionate effects in the countryside. Measured
inflation is already higher in rural areas (7.7% last months vs.
6.8% in urban areas), and rural families spend more of their budgets
on food. The economist commented that the widespread view that
farmers are benefiting from higher prices is misplaced: the effects
are highly variable across the country and now, in the wake of the
snowstorms, many farmers are contending with crop damage. Further,
farmers must contend with rising transportation costs and
infrastructure bottlenecks, he said.

BEIJING 00000580 002 OF 002

RANDT

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