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Cablegate: Prices Still Rising but Provinces Remain Calm

VZCZCXRO1436
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #1671/01 1210208
ZNR UUUUU ZZH
P 300208Z APR 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 6969
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 2203
RUEHFR/AMEMBASSY PARIS 4323
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 03 BEIJING 001671

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV EAGR SOCI CH
SUBJECT: PRICES STILL RISING BUT PROVINCES REMAIN CALM

REF: (A) Beijing 870

(B) Beijing 573
(C) 07 Beijing 7554

SUMMARY
-------

1. (SBU) Commenting on inflationary trends in their respective
localities, government officials and citizens in two provinces
outside Beijing recently expressed optimism that prices are
stabilizing and said their regions have not so far experienced
widespread social unrest or hoarding. Their comments followed the
April 16 announcement by China's National Bureau of Statistics (NBS)
that the Consumer Price Index (CPI) increased 8 percent in the first
quarter of 2008, well above the Central Government's stated goal of
containing inflation at 4.8 percent this year. According to the
national figures, inflation remains largely the result of rising
domestic food prices, which were up 21 percent in Q1, and the
Central Government continues to provide subsidies to enable
low-income urban residents to purchase meat. Experts in the two
provinces we visited acknowledge, however, that there remain
long-term structural concerns that threaten to apply upward pressure
on prices. END SUMMARY.

CPI SURGE CONTINUES IN 1ST QUARTER
----------------------------------

2. (SBU) China's first quarter economic statistics showed signs of
slowing with GDP growth at 10.6 percent year-on-year (down from 11.7
percent in the first quarter of 2007) along with falling growth
rates for exports, industry profit growth, the trade surplus, and
both broad and narrow monetary aggregates. However, NBS statistics
show that consumer prices continued their upward climb with the CPI
rising 8 percent for the first quarter and 8.3 percent y-on-y in
March (after reaching an 11-year high of 8.7 percent in February).
By contrast, CPI growth in the first quarter of 2007 was only 2.7
percent. Food prices rose 21 percent in the first quarter,
continuing to account for the bulk of the overall consumer price
increase. The housing component of the CPI increased 6.6 percent.


3. (SBU) Public commentary on the first quarter figures indicated
there is a broad consensus among analysts and economic officials
that the Central Government will not meet its stated goal of
containing inflation at 4.8 percent in 2008, which was announced
during the March session of the National People's Congress. Tang
Min, Deputy Secretary General of the China Development Research
Foundation, told Emboffs on April 3 that he remains concerned that
prices will continue to rise, particularly given growing pressure
from higher international grain and soybean prices.

THE GOVERNMENT'S COUNTERMEASURES
--------------------------------

4. (SBU) China's State Council introduced ten new measures to
strengthen support for the rural sector on March 27, including the
National Development Reform Commission's announcement of a rise in
the minimum procurement prices for rice and wheat. Announcing the
measures at the State Council meeting, Premier Wen Jiabao reportedly
pledged RMB 25.2 billion (USD 3.6 billion) in budget support for the
rural sector in addition to the RMB 562.5 billion (USD 80.3 billion)
already planned in the 2008 budget, as the Central Government aims
to stimulate agricultural production and combat high food prices by
boosting supply.

5. (SBU) With a view towards social stability, the Central
Government and local governments also have provided subsidies to
enable low-income urban residents to purchase meat during the past
several months. Contacts in Beijing and the provinces said they
believe these measures have been more successful and less disruptive
to the economy than administrative price ceilings would have been.

ALL QUIET IN THE PROVINCES
--------------------------

6. (SBU) Econoff traveled to Changsha, Hunan's Provincial Capital
April 22-23, and Shijiazhuang, Hebei's Provincial Capital on April
16-17 to solicit views on inflation and its impact on social
stability. Contacts in Hunan and Hebei -- where consumer prices
have risen 7.4 percent and 8.2 percent respectively in the first
quarter compared to a year earlier -- uniformly said there have been
no cases of social unrest or hoarding due to rising prices in their
provinces. The primary area of concern for social stability,
according to provincial contacts, remains the urban poor, who
already spend a high proportion of their income on food and are thus

BEIJING 00001671 002 OF 003


adversely affected by escalating prices for meat and edible oils.
Wang Liugen, Director of the Finance Department in the Hebei
Provincial Financial Securities Working Leading Group Office, noted
that 87 percent of Hebei's inflation is from food prices, and
Hebei's provincial government is especially focused on providing
subsidies to poor urban residents to compensate for the price
increases.

FARMERS BENEFITING FROM RISING FOOD PRICES
------------------------------------------

7. (SBU) Provincial contacts also expressed optimism that prices are
stabilizing, adding that farmers have benefited from higher food
prices to date. Peng Jianqiang, Director of the Rural Economic
Institute at the Hebei Academy of Social Sciences stated that he is
not too worried about food price increases because the domestic
price surge has been the result of a natural supply shortage
(especially of pork) that will correct itself in the near-term.
Prices have attracted negative media attention in cities, Peng said,
only because the prices of pork, grains, and edible oils all have
increased at the same time (rising 63 percent, 6 percent, and 43
percent respectively nationally in the first quarter compared to a
year earlier).

8. (SBU) In the meantime, Peng claimed, higher food prices are
boosting per capita rural cash incomes, which increased 18.5 percent
nationally in the first quarter of 2008 compared to a year earlier
(see also Re A). Farmers on the outskirts of Changsha in Hnan
Province confirmed that their agricultural income has increased
rapidly in the last year. In particular, a pig farmer told Econoff
on April 22 that his income from raising pigs increased four-fold
between 2006 and 2007 due to higher pork prices. (According to
national data, per capita rural cash income from the sale of all
animal products increased 30 percent in the first quarter of 2008
compared to a year earlier.)

9. (SBU) NOTE: Local government officials and farmers in both
provinces all said, however, that rural income gains are partially
off-set by rising input costs. In Hunan Province, for example,
officials at the Provincial Agriculture Bureau said fertilizer costs
increased 30 percent in 2007. A local flower and vegetable farmer
outside Changsha said his living standard is improving because of
higher prices, but rising costs definitely are cutting into gains
(Ref B). END NOTE.

CONFRONTING LONG-TERM PROBLEMS
------------------------------

10. (SBU) Provincial contacts stated that while they are confident
prices will stabilize soon, they remain concerned about long-term
structural weaknesses in the economy that may exacerbate inflation.
Ma Guohui, Deputy Director General of the China National Hybrid Rice
Research and Development Center in Changsha, summarized the
concerns, stating that in China:

(1) Small-scale farming is inefficient and slow to respond to supply
shocks in the domestic economy;

(2) Industrial production costs are rising, which is driving up
wages and creating an inflationary cycle; and

(3) Rising international prices are starting to affect the domestic
inflation situation.

Ma echoed the call by his organization's leader, Dr. Yuan Longping
(known in China as the "Father of Hybrid Rice"), to focus more
attention on agricultural technology in order to increase yields and
meet growing demand.

COMMENT: STABLE FOR NOW
------------------------

11. (SBU) Looking at government statistics as well as comments by
private analysts, the conventional wisdom -- first reported at the
end of 2007 (Ref C) -- that CPI inflation will come in between 6 and
8 percent this year, and is in little danger of spiraling out of
control, appears to be holding. Our visits to Hebei and Hunan
reinforce the impression of continued social stability despite price
hikes as incomes grew even faster. That being said, the government
will continue to monitor the impact of higher prices on the urban
poor and will pay close attention to rising input costs in the
countryside as it attempts to manage the higher expectations of a
population now accustomed to rapid real income growth.

APPENDIX: LOCAL VIEWS FROM HUNAN AND HEBEI

BEIJING 00001671 003 OF 003


-------------------------------------------

12. (SBU) In Changsha, Hunan Province, Econoff met with officials at
the Hunan Provincial Agriculture Bureau, Hunan Academy of Social
Sciences and National Hybrid Rice Research and Development Center as
well as with farmers on the outskirts of the city. In Shijiazhuang,
Hebei Province, Econoff met with officials from Hebei's Finance
Bureau, Education Bureau, and Academy of Social Sciences. In both
provinces, Econoff and Econ Assistant also interviewed average
citizens about their personal views on rising prices. A sampling of
those views is provided below:

--Engineer at the State Electricity Company, Beijing-Shijiazhuang
train--electricity prices unchanged, but Shijiazhuang residents
continue to be worried about increasing food prices.

--Grocery store clerk, Shijiazhuang--the price of food oils started
increasing significantly after Chinese New Year in February, but
otherwise, price increases have not been too severe.

--Migrant farmer from Henan Province, Shijiazhuang--selling walnuts
in city and will return home at grain harvest time. Income has been
pretty good because of food price increases, especially from
grains.

--Hebei Provincial Foreign Affairs Officer, Shijiazhuang--restaurant
prices going up but not that big of a deal. He and his wife (they
also have a 10-month-old daughter) do not want to hire a housekeeper
because it would be too expensive.

--Tour guide, Bailin Temple, Zhao County, Hebei Province--not much
tourism during the week, but historic sites continue to draw heavy
crowds on the weekends.

--Taxi driver, Changsha--spends money as soon as she earns it and
doesn't "worry about tomorrow." Has noticed price increases but not
concerned enough to change spending behaviors.

--Hunan Foreign Affairs Officer, Changsha--definitely have noticed
rising housing prices in Changsha, but food prices seem to be a
relatively minor issue.

--Flower and vegetable farmer, Xinjiang Village, Changsha
County--food price increases have been good for farmers, and he
lives comfortably, renting 80 mu in addition to the four mu he owns.
Hunan residents also recognize the pace of food price increases has
not exceeded that of income increases.

--Pig farmer, Xinjiang Village, Changsha County--income has
increased four-fold since 2006 because of higher pork prices. Hopes
prices will remain high, but he does not want prices to increase
further as that might attract new entrants into the market and
suppress prices in the long-run. He added that he has done well
because Blue Ear disease broke out in Sichuan Province but did not
affect pigs in Hunan Province.

© Scoop Media

 
 
 
 
 
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