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9 Apr 2008

Thai Economy

China’s Economy Pressured by Inflation & US Economic Slowdown: Impact on Thai Exports to China (Current Issue No.2059)

Since early 2008, China's economy has been challenged by the US economic downturn which is on the verge of recession and the rising inflation. For the first two months of this year (January-February), Chinese economic data have signaled slower growth in both external and domestic indices. KASIKORN RESEARCH CENTER (KResearch) estimates that even though China's decelerating exports caused by lower shipments to the US in 2008 will inhibit the economic growth, the Chinese economy will be sustained by domestic factors, i.e., investment and consumption, albeit the rising inflation early in the year, which has affected manufacturing production and consumer spending.
China's inflation rate in February 2008 rose to 8.7 percent over the same period last year - the highest level since October 1996. The acceleration was attributed to spikes in food prices as a result of supply shortage following bad weather wreaking havoc throughout southern region, thus disrupting transportation and power supply in the area. China's manufacturing production and retail sales thus recorded slower growth during the first two months of 2008.
However, during the latter half of this year, China's economy is expected to show a promising sign from subsiding inflation, thanks to more stable food supplies and pickup in the US economic growth. The US economy is expected to reach the trough during the first half of 2008, supported by the US stimulus programs. Among other favorable factors for the Chinese economy are their solid economic fundamentals and the government's spending on mega-projects such as roadways, airports and logistical infrastructure, which will help boost their fundamental strength and spur domestic factors, thus reducing their dependence on external factors. China's economic growth in 2008 is therefore projected to be in a range of 9.0-10.0 percent, down slightly from the 11.4 percent in 2007.
Impact of Chinese economic slowdown on Thai exports
KResearch estimates that despite the slowing Chinese economy in 2008, impact on Thai exports to the Chinese market is likely to be limited given that Thailand's exports to China are mainly capital goods and raw materials used for production to serve the growing domestic consumption. In addition, the Chinese government has a policy of investment in infrastructure-related projects to stimulate domestic economy in lieu of lower exports this year. Thai exports to China are thus expected to record steady growth this year. This is because Thai exports earmarked for Chinese production to serve domestic consumption account for more than half of the overall exports from Thailand to the mainland.
Meanwhile, our intermediate products shipped to China for re-export to the US market, such as computers and components, chemical products, integrated circuits and plastic pellets may bear the brunt of the US economic downturn, that may slip into recession. The appreciating Chinese Yuan will also be a challenge to China's competitiveness, which may in turn affect Thai exports to China earmarked for re-export to the third countries. However, it is expected that Chinese authorities will adopt the policy of letting the Yuan rise gradually to cushion the impact on exports, especially those of Chinese SMEs. Despite the Yuan's appreciation this year, China still has a competitive edge in terms of production costs, especially their lower wages than elsewhere.
In conclusion, KResearch expects that the US economic malaise may deal a blow to Thai exports to China, particularly raw materials and intermediate assemblies for re-export to the US market. However, Thai exports earmarked for Chinese domestic consumption are likely to show steady growth thanks to expansion in industrial sector and domestic consumption in the mainland. All in all, KResearch projects that Thai exports to China may grow 25 percent in 2008, close to the growth of 26.5 percent seen in the previous year.

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Thai Economy