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Cablegate: China Inflation: Asset and Consumer Price Pressure In

VZCZCXRO7547
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #6609/01 2850119
ZNR UUUUU ZZH
P 120119Z OCT 07 ZDK
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 2696
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1980
RUEHFR/AMEMBASSY PARIS 4176
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 006609

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV ETRD EINV CH
SUBJECT: CHINA INFLATION: ASSET AND CONSUMER PRICE PRESSURE IN
FOCUS DURING THE "GOLDEN WEEK" JUST BEFORE PARTY CONGRESS

REF: (A) Beijing 5578
(B) Shanghai 553
(C) Hong Kong 2598
(D) Shanghai 534
(E) Beijing 6286

SUMMARY
-------

1. (SBU) Rising asset and consumer prices, and Central Government
reactions to the increases, continued to draw attention during the
recently concluded "Golden Week" period. With the 17th Party
Congress set to open on Monday, October 15, inflation remains a
predominant domestic economic concern. Illustrating the intense
public interest in rising prices, one local Beijing newspaper
featured a special section on October 2 that took a comprehensive
look at price increases in the housing market and stock market as
well as continued CPI inflation and the impact of recent shocks on
urbanites. END SUMMARY

NEW SURVEYS REFLECT CONCERNS
----------------------------

2. (U) On the cusp of the October 1 National Day Holiday -- one of
China's "Golden Weeks" when offices are closed for seven days in
order to stimulate consumption through shopping and travel --
government surveys indicated that rising prices are causing a fall
in stisfaction with the economy for the first time in recent
memory. The People's Bank of China (PBOC) reported on September 20
that:

--The 3rd Quarter National Bankers Survey showed that the bankers'
confidence index had decreased to its lowest level historically with
83 percent of bankers stating that they are concerned about the
economy;

--The 3rd Quarter Entrepreneurs survey similarly demonstrated that
confidence is slipping with the entrepreneurs' confidence index
falling by 6.4 percent; and

--In the 3rd Quarter Urban Depositors Survey, nearly half (47.1
percent) of respondents said prices are "too high."

3. (U) Facing mounting concerns on prices, the National Development
Reform Commission (NDRC), together with seven other ministries,
issued a notice on September 21 which emphasized the importance of
price stability during the Mid-Autumn Festival and National Day
Holiday. The circular cited the recent surge in the Consumer Price
Index (CPI), which rose by 6.5 percent year-on-year in August (Ref
A, B, C), the highest rate in over ten years, and recommended
measures for alleviating price pressures during the holidays.
Chinese economists have expressed concerns about price stability
since the summer with one prominent China Academy of Social Sciences
(CASS) researcher stating in mid-August that China is "entering an
inflationary period" (Ref A).

HOUSING MARKET DRAWS RENEWED ATTENTION
--------------------------------------

4. (U) Late September also brought new Central Government
pronouncements on housing prices with the NDRC announcing that
housing prices have continued to accelerate in 2007. Over recent
months, housing prices rose in 70 large and medium cities as
follows:

MONTH PERCENTAGE INCREASE (yoy)

April 5.4
May 6.4
June 7.1
July 7.5
August 8.2

The PBOC and China Banking Regulatory Commission (CBRC) attracted
widespread public attention on September 27 when they jointly issued
a notice that seeks to strengthen mortgage loan management in an
effort to curb the rise in housing prices and speculation in the
property market. The PBOC-CBRC notice requires commercial banks to
increase mortgage loan interest rates to 1.1 times the benchmark
one-year lending rate and also requires higher down payments on
houses.

PBOC PREDICTS CONTINUED INFLATION
---------------------------------

BEIJING 00006609 002 OF 002

5. (U) The PBOC Monetary Policy Committee stated after its 3rd
Quarter Conference on September 28 that excess investment growth,
China's trade surplus and excess loan issuance continue to exert
inflationary pressure on prices. (Note: The PBOC Monetary
Committee's 2nd Quarter Report suggested that inflationary pressures
already were spreading rapidly to other consumer items. End Note.)
A PBOC Research Bureau report also estimated that the CPI would
increase 4.6 percent for 2007 and 5 percent in the first half of
2008 while GDP would increase 11.6 percent for the year and 10.8
percent during the first half of 2008.

STOCKS SURGING TO NEW HIGHS
---------------------------

6. (SBU) Immediately after the holiday, the stock market again made
front page news on October 9, breaking the 5700 level and setting a
new high. The Shanghai Composite Index opened on October 10 at 5742
and rose as high as 5860 before dropping to close at 5771.42. The
market surpassed 5000 just six weeks ago (Ref D).

PARTY CONGRESS TO OPEN ON OCTOBER 15
------------------------------------

7. (SBU) Inflation remains a predominant domestic economic concern
as the 17th Party Congress prepares to open on October 15 (Ref E).
One popular local newspaper in Beijing (Xin Jing Bao) greeted
readers on October 2 with a special section on prices, demonstrating
the growing public concern about increasing consumer and asset
prices. The articles highlighted both price spikes in consumer
products (especially food) and rapidly increasing asset prices in
the housing and stock markets and detailed the impact of price
increases on urban residents -- by all accounts, a continued
political concern as the Congress opens.

PICCUTA

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