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2 Nov 2007

Thai Economy

Yuan Trend: Rising Gradually, a Blow to Thai Exports (Current Issue No. 1999)

China's overheating economy is likely to prompt Chinese policymakers to adopt more stringent measures to cool it down. Even so, KASIKORN RESEARCH CENTER (KResearch) takes the view that any move to slow the economy may be gradual and similar to what has been seen recently. Among them would be gradual hikes in interest rates and banks' reserve requirement ratio along with tighter control of the money supply and credit growth. For the Chinese Yuan, KResearch views that there is little likelihood that the Chinese authorities will allow a one-off Yuan revaluation. Despite stronger pressure from China's trading partners, the Chinese policymakers may opt to allow greater flexibility to the Yuan, letting it strengthen at a ;measured” pace while managing forex market stability. In our opinion, rather than letting it float freely or move up substantially in a single blow – which would surprise the market - allowing the Yuan to rise gradually under the scrutiny of the Chinese authorities would help stabilize the prevailing turbulence in capital flows around the globe. This would benefit regional currencies, including the Baht.

However, gradual appreciation of the Yuan also implies that the Chinese authorities will be keeping a close watch on Yuan movements to avoid sharply negative impacts, and would help to maintain the competitiveness of China's exports. Therefore, KResearch is still concerned about the competitiveness of Thai exports versus those of China. Particularly when the Baht will harden against the softening USD and the Yuan is still under strict control by the Chinese government. This may cause Thai authorities to face challenges in maintaining Baht stability and relieve pressure on the competitiveness of the Thai export sector as the Baht may inevitably have to face continual softening of the USD in next phase.

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