China’s Inflation Accelerating, Exports Remain Competitive (Business Brief No.2064)

During the nine-month period of 2007, China's average inflation gauged by the CPI stood at 4.1 percent, higher than Thailand at 2.0 percent. The acceleration in Chinese inflation could be attributed to a 10.7 percent rise in the food segment of their CPI. Meanwhile, the average Chinese inflation measured by their PPI over the first three quarters of 2007 was 2.7 percent, down from the rate of 3 percent during the same period of last year. As for Thailand's PPI, it stood at only 2.0 percent over the first nine months of 2007.

Although Thailand's CPI and PPI were lower than those of China, we should not overlook two other key indices, i.e., exports and the exchange rate. Compared to last year, the USD has so far weakened 9.4 percent against the Baht, but softened only 4.3 percent against the Chinese Yuan this year. Taking into account changes in the exchange and average inflation rates gauged by CPI and PPI of the two countries, it was found that Thailand's import costs had advanced by 11.4 percent both for consumers and producers; whereas their Chinese counterparts had experienced increases of only 8.4 percent and 8.0 percent, respectively. This suggests that Thailand remains at a disadvantage to China because Thailand's higher export costs were more pronounced than China's.

Growth in Thailand's and China's Export Costs, January-September 2007

Source: KResearch – Baht and Yuan rates vs. USD, average January-September 2007

Thai Adjustment to the Stronger Baht

The Baht appreciated more, causing the export costs of China to gain further advantage over Thailand. Thai authorities should find sustainable solutions to enhance the competitiveness of Thailand versus foreign countries – including China – by increasing the potential of industry. KResearch is of view that the government sector should play a vital role in helping entrepreneurs as referred to in the following:

- The government sector should establish policies to boost competitiveness for Thai entrepreneurs as a national item of agenda: They should set the direction for the development of Thai industry in boosting long-term competitiveness over other countries. That policy should place importance on the development of personnel skills and better infrastructure to reduce transportation costs. In addition, the authorities should provide assistance with the acquisition of technology, and urge entrepreneurs to utilize natural resources economically, etc.

- Thai government and private sectors should seek business cooperation with China: Previously, China imported raw materials from Thailand in large volumes of such produce as rubber, potatoes, plastic resin and dried longan for use as raw materials. The government should provide assistance on technology and capital for Thai manufacturers to enhance their competence in raw material production for export.

- On the part of Thai industries, skilled manufacturers who still suffer from cost weakness compared to China – such as labor-intensive industries – should receive government sector promotional privileges on investments in foreign countries where there are low wage levels and many other natural resources, such as found in Laos and Vietnam. As a result, Thai exports would be better able to compete with China.

Amid tough competition from other countries including China, adjustments by the government and private sectors are needed, and it is becoming an important issue on which the new government should focus to ensure that Thai production and exports grow in the future.