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Cablegate: Are China's Inflation Numbers Deflated

VZCZCXRO5387
PP RUEHCN RUEHGH RUEHVC
DE RUEHSH #0248/01 3530816
ZNR UUUUU ZZH
P 190816Z DEC 07
FM AMCONSUL SHENYANG
TO RUEHC/SECSTATE WASHDC PRIORITY 8307
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY 0783
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY 0212
RHEHAAA/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 SHENYANG 000248

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD ELAB PGOV CH
SUBJECT: ARE CHINA'S INFLATION NUMBERS DEFLATED

REF: SHANGHAI 784

1. Summary. Recent press and government reports put China's
inflation rate at around six percent per year and attribute
most of the rise to food prices, which constitute one third
of the core index. However, a recent visit to local markets
indicates that the real rate of consumer price inflation )
at least in this part of China - is much higher. A one-year
comparison of a basket of staple foods showed increases in
the range of 50-60 percent, and local consumers are clearly
hurting. End Summary

--------------------------------------------- -------
It's A Good Thing Inflation Is Low--Otherwise These Prices
Would Kill Us
--------------------------------------------- -------

2. After listening and reading much inflation-related
commentary in the press, Econoff decided to visit a local
supermarket to investigate for himself. Armed with a grocery
receipt from his first shopping trip after arriving at Post
in December, Q006, he was able to construct his own crude
&market basket8 for calculating inflation. Comparing item
for item at the same store one year later turned out to be
quite enlightening. Only one of the seventeen items on the
list, instant coffee, showed no inflation at all. The
increase for the other items ranged from 17 percent to 480
(four-eight-zero) percent, most prices rising in the 40-50
percent range.

3. While certainly not scientific, the comparison provides a
fair insight into the problems faced by the local citizenry.
The items on the list included primarily staple foods common
to the Chinese diet. Pork and chicken prices had doubled
year-on-year, rice was up 33 percent, cooking oil was up 17
percent, and bread was up 30 percent.

4. The really shocking increases were in the prices of fresh
fruit and vegetables. Carrots and tomatoes topped the list,
at well more than four times last year,s price. Lemons,
papaya, and dragon fruit had all doubled, while apples and
cucumbers had tripled. Despite the price increases, the
store was jammed with shoppers jostling to get the first pick.

----------------------------------------
Controlling Prices the Old-fashioned Way
----------------------------------------

5. Prices posted at a nearby traditional market were notably
lower than at the &big box,8 western-style market visited
at the first stop. A vendor in the traditional market,
however, confided to Econoff that things were not all they
first seemed: two key mechanisms allowed them to keep prices
lower than those at the big markets. The first step, she
explained, is to buy produce that failed to pass the larger
store's stricter testing and inspection regime, cheerfully
noting that the rejected goods were much cheaper. The second
step, which she offered with a wink and a nod, is to raise
the price slightly and, by adjusting the scale, make a
corresponding reduction in the amount of food measured per
kilogram. She explained that this avoided discouraging
customers by posting really high prices.

----------------------------
What Can You Do With the RMB
----------------------------

6. Econoff decided to add to his admittedly unscientific
research by asking a sample of taxi drivers if rising prices
posed a problem for them and their families. The response
was uniform across the board: rising prices were a major and
growing hardship. Most said they are dealing with the
situation by eating more rice and less of everything else.
Asked if the appreciation of the renminbi is making imported
foodstuffs more affordable, one driver responded, "The only
thing you can buy more of is U.S. Dollars. But you can't eat
dollars, and they buy even less rice than the RMB."

7. While not rigorously accurate, the above brief survey
indicates that food price pressures on local citizens are
likely much greater than what is being reported by government
statisticians and the local press, the incidence being
greatest on low-income groups. Our purchases of equal
amounts of identical items one-year later resulted in an
overall price increase of 57 percent. Unless there is real
deflation in the other parts of the core index, it seems
clear that the government's numbers, at least as they relate
to Northeast China, are substantially lower than they should
be.


SHENYANG 00000248 002 OF 002


WICKMAN

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