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27 Jul 2005

International Economy

China Turning to Currency Basket System: Causes & Outlook for Thai Trade-Tourism-Investment


The Chinese authorities finally unpegged the Yuan, shifting to a weighting against a basket of currencies on July 21, 2005. Key factors influencing the policy change can be summarized as follows:

- To cool its overheating economy: Throughout last year, the Chinese authorities implemented scores of measures to slow its economic growth to around 5 percent, on average. However, the Chinese economy shows no signs of cooling off, with their growth standing at 9.4 percent and 9.5 percent in the first and second quarters of this year, respectively.

- To ease pressures of protectionism: China had been under pressure from its key trade partners, i.e., the US and European Union, to allow the Yuan to have greater flexibility. Of late, the US has been preparing to pass a bill to lift import tariffs on Chinese goods, citing that the Mainland had adopted a foreign exchange regime that gave the country an unfair trade advantage over the US.

- To enhance its status as a world leader: Making the Yuan more flexible will be a boon to businessmen and investors. Even the governments of other countries will also benefit from a more flexible Yuan. After the change in China's foreign exchange regime, they will likely no longer be concerned about when the Yuan will be revalued, thus allowing them to efficiently set economic targets and policies.

Impact on the Thai economy

1. Impact on Thai trade

- Rising Thai exports to China will help reduce Thailand's trade deficit with the Mainland. The stronger Yuan should be a boon to Thailand's exports to China, as foreign goods will become cheaper for Chinese importers and consumers. As a result, this may also prompt the Chinese to purchase more Thai products, particularly raw materials and semi-finished goods. Meanwhile, with the Yuan on the rise, Thailand is poised to slow its imports of some Chinese items that will become more expensive. Thus, Thailand's trade deficit with China, posting as high as USD1.263 billion over the first five months of this year, should fall.

- Thailand's export competitiveness vis-เ-vis China depends on quality. The initial appreciation of the Yuan and Baht will be unlikely to affect Thai or Chinese products substantially in world markets over the short-term. In the long run, however, Thai exports are expected to fully receive a windfall from the strengthening Yuan, if it appreciates by around 15-20 percent. In the meantime, improvements in, and maintenance of, product quality to achieve international standards is something that Thai exporters must take into account and seriously expedite. In so doing, Thailand's competitive capabilities will undoubtedly be enhanced in a sustainable manner.

2. Effects on Tourism in Thailand
  • Chinese tourists will have higher purchasing power: The stronger Yuan will increase the purchasing power of Chinese people, if even only slightly in the initial period of Yuan revaluation. But it will allow Chinese people to experience prices for package tours cheaper than before, which would be favorable for more Chinese people to travel overseas. However, how much Thailand will benefit from the expansion of Chinese tourism will depend on how it attracts Chinese tourists amid tougher competition from rival countries in Europe, Africa and Australia. Moreover, the problem of 'zero-dollar' tours must be urgently solved while confidence in the safety of tourists traveling to the Andaman coast must also be assured.

For the trend in the Chinese tourist market for 2005, it is estimated that around 800,000 Chinese tourists will travel to Thailand, which would represent an increase of 2.7 percent over 2004, where there were totally 779,070 Chinese tourists; this will mean 7 percent higher tourism income for Thailand, with a value of around Baht21,000 million.

3. Effects on investment
  • The trend will likely cause Chinese capital to flow to Thailand in the long run - but in the short-term, the effect on Chinese investment in Thailand, from the stronger Yuan, is still not be evident immediately, because investment projects need time for planning and feasibility studies. In the long run, it is possible that the Yuan will get stronger and stronger; therefore it is expected that Chinese investors and entrepreneurs will expand their investments in Thailand, because a stronger Yuan will enable Chinese investors to save some on their investment overseas capital. In addition, the Chinese authorities have a policy to encourage Chinese investors to invest overseas to seek raw materials and expand to export to new markets, so the Thai authorities' plans to develop mega-projects over the next 4-5 years will be a factor to attract more Chinese investors to jointly invest in Thailand. China has paid some significance to investments in Thailand because Thailand is a strategic center that can link trade and investment between China with other ASEAN countries. Apart from direct investment, the Thai authorities also have policies to attract Chinese investors to invest in the Thai stock market, which would likely benefit the Thai stock market in the second half of this year.

International Economy