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Cablegate: Party Economist Looks to Control Prices,

VZCZCXRO7522
RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3257/01 2380207
ZNR UUUUU ZZH
R 250207Z AUG 08 ZDS
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 9486
INFO RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 03 BEIJING 003257

C O R R E C T E D C O P Y//PARA 9 & 14 MARKING//

SENSITIVE
SIPDIS

STATE FOR EAP/CM

E.O. 12958: N/A
TAGS: ECON EFIN WTRO ENRG EAGR CH
SUBJECT: Party Economist Looks to Control Prices,
Growth; Offers opinion on Doha

Ref: Internal note 8/5/08

BEIJING 00003257 001.3 OF 003


1. (SBU) Summary: Economic M/C met with Senior
Communist Party Economist Zheng Xinli to discuss
current economic issues. Zheng noted that the
declining dollar was eroding the value of China's
dollar-denominated assets. He thought China's
inflation was the result of externalities such as
rising international agricultural and oil prices,
suggesting China should allow prices to rise only
slowly and should protect domestic pork and edible oil
producers while limiting foreign investment. Zheng
felt comfortable with slower growth, particularly if
it implied a rebalancing of the domestic economy.
Offering his opinion on Doha, Zheng thought that China
had supported India for political reasons, and that
China's agricultural sector was already open. End
summary.

2. (SBU) Econ M/C met with Chinese Communist Party
Central Policy Research Office Vice Minister Zheng
Xinli to discuss current economic issues. (Note:
Zheng is number two at the CPC CPRO, the party's
internal think tank. He directly advises the party
leadership on economic issues. End note.) Covering a
wide range of economic topics, Zheng speculated about
the impact of global economic factors on the Chinese
economy.

Depreciating Dollar, Sub-prime Crisis
------------------------------------

3. (SBU) Zheng said that the depreciating dollar was eating
away at the value of USD assets held by China. He noted,
with a smile, that Xia Bin's suggestion that China sell USD
assets had "even attracted the U.S. President's attention."
(Note: In October 2007, State Council Development Research
Center Institute of Financial Research Director Xia Bin was
quoted as saying that if the United States imposed trade
sanctions on China, Beijing should not rule out using
foreign reserves as a "bargaining chip" in talks with the
United States. End note.) (Comment. It is questionable
whether reports of Xia's comments were accurate. CASS
economist He Fan had also been mentioned in the same report
as having made similar comments. When Emboffs met He
subsequently to clarify what he had said, he claimed he had
been misquoted. Econ M/C noted this fact in replying to
Zheng. End comment.)

4. (SBU) Zheng blamed slowing Chinese export growth on the
U.S. sub-prime mortgage crisis, which he attributed to
excessive U.S. deregulation and over reliance on markets
resulting from the repeal of the Glass-Steagell Act. Zheng
criticized Congressional pressure on China, saying the
Congress should listen to the "large number" of prominent
U.S. economists, for example Joseph Stiglitz, who have
argued for a less confrontational approach.

Controlling Rising Prices
-------------------------

5. (SBU) Moving on to inflation, Zheng noted that China had
raised the price of oil products 18 percent this year,
lifting CPI by one percent annually. Still, China's
gasoline prices--at only 60 percent of U.S. prices--remain
well below the norm in developed countries. He stated oil,
grain, and steel products all faced price pressure, but
thought prices should be adjusted gradually over several
years in order to make the increases more "affordable."
(Note: DRC's Xia Bin recently offered similar suggestions
in the Chinese media. End note.) Zheng, however, also
commented favorably on recent adjustments to domestic
energy prices, and said prices should be further adjusted
to eventually reflect global market prices.

6. (SBU) Zheng said that this round ofinflation was
caused by a surge in agricultural prices such as pork and
edible oils, and not by excess liquidity. As a result, he
objected to the idea that tighter monetary policy would
reduce inflation. He thought looser credit and export
rebates would help small- and medium-sized enterprises. He
also suggested limiting investment and encouraging
consumption to spur domestic demand.

Pork and Oil Protection
-----------------------

7. (SBU) Zheng strongly disagreed with the suggestion that
blue ear disease had caused a pork shortage, stating that
the Ministry of Agriculture had made up the excuse to

BEIJING 00003257 002.5 OF 003


"shirk their responsibilities." Pork prices have now
declined for eight consecutive months, causing Zheng to
worry that they were declining too quickly. He proposed a
"price protection system" and controlled imports to protect
pig farmers and pork producers.

8. (SBU) Likewise, Zheng said that 62 percent of
edible oil was imported and 70 percent of domestic
production was by foreign-invested companies that
imported oil crops from their home countries. He
attributed China's relatively high domestic edible oil
prices to this dependence on foreign producers--
mentioning Cargill by name. He called for China to
increase its edible oil self-sufficiency to curb
prices, and noted that as a factor in the decision to
add edible oil production to the restricted list in
the investment catalog in order to limit foreign
ownership.

Export Controls
---------------

9. (SBU) Zheng noted that U.S. efforts to block Chinese
acquisition of advanced technology would fail, since China
can source these products from other countries or develop
the technology indigenously. He added that efforts to do
so will only hurt U.S. exports and employment.

Future Growth
-------------

10. (SBU) Zheng said China's GDP should grow more slowly,
at about 9 percent a year. He was pleased that China's
economy was rebalancing, with middle and western provinces
growing faster than the coast; heavy industry growing
faster than light industry; private enterprises growing
faster than state-owned enterprises; and agriculture sector
investment growing faster than industry and service sector
investment. He reported that fiscal revenue was rising and
the trade surplus was declining. (Comment. While it is true
that, at the moment, many of the inland provinces and non-
manufacturing sectors are growing relatively quickly, this
is more likely due to a cyclical downturn in exports and
construction than serious rebalancing of China's economic
structure. End comment.)

Doha
----

11. (SBU) Zheng said the United States should criticize
India instead of China for failing to reach agreement on
opening agriculture markets. He said China supported India
because of "political and other concerns." He repeated
several times that China still has a low per-capita income,
and as a developing country could not possibly have split
with India on this issue. He claimed that China has a more
open agriculture market than many countries, and imports
huge quantities of soybeans and cotton every year. That
said, he stated China should not open its grain market.

Comment
-------

12. (SBU) By virtue of his position and his opinions, Zheng
Xinli is very influential within the Chinese policymaking
community. During the recent debate over whether China
should maintain its current monetary policy stance--which
the Chinese characterize as "tight," but which by many
normal economic standards is still fairly loose--to manage
inflation or should increase credit to hurting exporters
and developers, Zheng argued for taking a middle road with
targeted fiscal measures but continued credit quotas. He
noted there are two diametrically opposed schools of
thought on this issue, one led by former CASS economist Liu
Guoguang which opposes monetary easing, and a second
represented by former Beijing University Economics
Professor and CPPC member Li Yining which argues that China
has already entered a period of disinflation.

13. (SBU) Zheng is a strong proponent of economic
restructuring aimed at spreading the benefit of China's
economic growth to previously disadvantaged segments of the
country. Zheng also oversees an Agricultural Policy
Institute which has done extensive work on the rural
economy. His comments on Doha likely reflect his affinity
for China's farmers and belief that China's agricultural
sector is already open to the international market. His
views are not unusual within the CPC.

BEIJING 00003257 003.4 OF 003

Biographical Note
-----------------

14. (SBU) This is our second meeting with Zheng. The first was
at adiner hosted by U.S. direct selling company officials
who were sponsoring Zheng on a visit to the United States
to investigate the direct selling industry. Both times, we
found him accessible and willing to share his opinions
freely. This is in contrast to officials from the State
Council policy office who have consistently turned down our
requests for appointments, explaining that their unit is
restricted from meeting foreign contacts. Also attending
the lunch were the Director of Economic Research Jin (name
unknown), and Zheng's personal secretary Zhao Zhijie.
Zheng told us he may be traveling again to the United
States later this year.

RANDT

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