China's currency devaluation: Thailand's economic nightmare?

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TELL IT AS IT IS
China's currency devaluation: Thailand's economic nightmare?
Pornpimol Kanchanalak
Special to The Nation

BANGKOK: -- Yesterday, the People's Bank of China cut the value of its currency for the second day in a row. Analysts now estimate that the yuan has depreciated more than 3 per cent against the US dollar, having already dropped 1.8 per cent when China "threw a curveball" the day before. Most media called it a surprise move, but observant economists had seen it coming for quite some time.

Markets around the world are reacting with increasing anxiety. Yesterday, the Dow Jones Index dropped 212 points, NYEX was down 4 per cent, the S&P 500 tumbled 20 points, European stocks fell 1.6 per cent, while the price of oil and copper dropped 4 and 3 per cent respectively

Basically, what China is doing is exporting deflation. That means shrinking demand and diminishing purchasing power across the globe. In recent years, China's GDP has grown at an anaemic rate of less than 7 per cent after years of double-digit boom. Beijing has responded with all the traditional antidotes against deflation, including monetary and fiscal stimulus policies and interest rate cuts. When those measures failed to stop the slump, the devaluation of its currency was the unavoidable remedy of last resort.

Investors are now concerned that China's economy is even weaker than anyone could have guessed. As such China may start pulling back on purchases of goods and services from other countries. In the US, whose currency is strengthening in reverse proportion to the weakening yuan, manufacturers fear for their already weakening export prospects, and the stronger dollar will make the competition even tougher.

Bank of America's preliminary analysis pointed out another significant ramification of the yuan depreciation besides the worldwide deflationary pressure - a foreign exchange currency war. Traders are betting heavily that the yuan will continue to fall, and the risk premium is being built into the yuan spot market. Central banks in several countries might follow China's lead and devalue their currency too. Already, anger is being expressed in Washington, where lawmakers are accusing China of playing currency-manipulation tricks on them.

With China's growing stature as a world economic powerhouse, the yuan is now part of the global economy's fabric. In the global village in which we all live, when China sneezes, the rest of the world catches a cold. For a small developing economy like Thailand, the cold could turn into pneumonia and cause havoc.

Two years after China devalued its currency in 1994-5, Thailand suffered its nightmarish Tom Yum Kung financial crisis. In the last days of the 1997 crisis, our exports experienced zero growth despite signs to the contrary which were the result of VAT fraud. Our current account deficit at that time brought down the exchange rate regime that had been rendered unsustainable.

Are we about to suffer a repeat of the economic meltdown in 1997? Not quite, but the outlook is gloomy.

Our exports are in the red, and the colour is turning crimson. With the world experiencing deflation that China is exporting, we will see further shrinkage of demand and purchasing power from the markets for Thai products. The recovering EU markets will turn to our Asean neighbour, Vietnam, which has just concluded a free trade agreement with the Europeans. We have no new markets and no niche products to give our exports a boost.

Tourism, our No 1 foreign exchange earner, will likely suffer due to shrinking purchasing power and disposable income among the Chinese, who constitute the largest portion of our visitors.

The baht will likely fall more steeply than expected, for several reasons.

The Bank of Thailand (BOT), in its attempt to keep the baht low without lowering the interest rate, has erroneously embarked on further financial liberalisation. Today, a Thai can send out US$5 million per day as opposed to $500,000. Well-to-do Thais are now allowed to remit $50 million per year to purchase property overseas, as opposed to $5 million. With the uncertainties around the baht's future value amid the yuan's devaluation, money will flow more freely out of Thailand, bringing added pressure to devalue the Thai currency even further.

The BOT has also allowed a higher quota for short-selling the baht - up from Bt300 million to Bt600 million. This will add to the volatility and helps neither the baht nor our financial health, especially at a time when we need more stability.

Thai exports will become increasingly less competitive in the world markets under our current exchange rate regime. Further contraction in export revenues will hit our balance sheet and hence our foreign exchange rate.

And for a double (or triple) jeopardy, Thailand will find that ignoring the Trans-Pacific Partnership (TPP) trade deal negotiations will come back to haunt us. Mexico has called for a TPP "rule of origins" that would prohibit TPP members from sourcing products from non-TPP countries. Japan, a major player in the TPP, buys lots of automobile parts from Thailand. If the TPP's rule of origins kicks in, Japan will have to look elsewhere for automobile parts suppliers and shift its investments in this sector away from Thailand.

Analysts at HSBC estimate that there is about 1 trillion yuan waiting to be sent overseas by wealthy Chinese and Chinese corporations, and it's taking place every single day. The US will be an important destination for the drain. That enormous outflow of capital will add to the deflationary trend of the Chinese currency, and hence of the baht.

While our high-net-worth individuals and large corporations will always be able to weather the financial maelstrom, it is our farmers, small and medium-sized enterprises and middle class that will be hit in the pocket. They will find their purchasing power dissipating by the day. In direct proportion, the majority of the population will become more vulnerable and disenchanted.

And the worst part of it all? There is nothing we can do to avoid the suffering. The eleventh hour has passed and we have missed the rescue trains.

Source: http://www.nationmultimedia.com/opinion/Chinas-currency-devaluation-Thailands-economic-nig-30266475.html


-- The Nation 2015-08-13

[kotsak]

[Seastallion]

In the long run, Thailand is better off NOT joining the TPP.

[chaiyapoon]

The Thai economy has been ailing for quite a while now,but the baht has been staying higher than seems to warrant. Will it manage to weather all the issues in the article? Who really knows?It seems to have got through a lot of issues with little damage so far.

[ezzra]

Good.... maybe this will put a damp and stem the tide on the hoards of Chines cheap tourists,

millions of them are running around like ants, travailing often into DM and swampy air ports, all

that you see is thousands of them coming and departing...

[Usernames]

"Investors are now concerned that China's economy is even weaker than anyone could have guessed."

Only people with a limited time horizon have failed to see what is coming. Greedy, narcissistic people who thought that their wealth was due to their own acumen are about to start jumping out of tall buildings.

[puukao]

Bt my realtor told me now is the BEST time to buy!!!!!!!?!?!?!?!?!

I saw this sweet place 10-years ago for 1 million baht, now it's at 11 million and might go to 100 million.

this news isn't important, according to some lady telling me to fly to China and visit her family

do dah

[Credo]

"Investors are now concerned that China's economy is even weaker than anyone could have guessed."

Only people with a limited time horizon have failed to see what is coming. Greedy, narcissistic people who thought that their wealth was due to their own acumen are about to start jumping out of tall buildings.

But I thought this topic was about China, not Greece?

[MZurf]

Not to worry:

"The Ministry of Finance and the Bank of Thailand (BOT) have confirmed that China’ decision to weaken its currency, Yuan, won’t affect the country."

[Ulic]

One article stating factually the devaluation will have absolutely no effect on the Thai economy

and this one is doom and gloom. I will guess somewhere in between but leaning this way.

[laocowboy2]

I worry about this newspaper. First we have the delusional

Thai economy unaffected by weakening Yuan

and now we have the opposite - only on steroids.

Thailand's economic nightmare?

Equally delusional.

Yes the Yuan devaluation will create some headwinds for Thailand (as well as for other countries) but no - it does not mean that the world is ending or that the auto industry will decamp to Vietnam.

[zakk9]

This journalist seems to have an agenda, part of it being TPP. This is not journalism.

[chilli42]

There is a silver lining. The opportunities for large profit gains during time of instability far exceeds periods of stability and growth. Invest now, don't miss the opportunity. Take a look at China's foreign exchange reserves remind yourself of the size of the domestic market. The current situation is no more than a cleansing fart/belch for China. The internal investment market is overheated. This will simply get them back to solid ground. If you don't feel comfortable with investing in China then put some coin into Canadian or US real estate on the west coast. The Chinese will be on a buying binge .... bigger than what has already been happening.

[Chao Lao Beach]

In the above article it said,

"The recovering EU markets will turn to our Asean neighbour, Vietnam, which has just concluded a free trade agreement with the Europeans. We have no new markets and no niche products to give our exports a boost."

Anyione know any more info on this ?

[zakk9]

In the above article it said,

"The recovering EU markets will turn to our Asean neighbour, Vietnam, which has just concluded a free trade agreement with the Europeans. We have no new markets and no niche products to give our exports a boost."

Anyione know any more info on this ?

This is a part of the journalist's agenda. She is a firm believer in Free Trade Agreements and the corporations that will gain from them. Thailand has shown through many decades that they can do very well without those agreements. I wonder who pays her salary...

[elgordo38]

Not to worry:

"The Ministry of Finance and the Bank of Thailand (BOT) have confirmed that China’ decision to weaken its currency, Yuan, won’t affect the country."

Even swampland in Florida is getting expensive these days. These soothing comments by Thai bank and Ministry of Finance only make me more doubtful that there is a problem. These levels of government are professionals at glossing things over. By the time we become aware of a financial crisis we will be in the middle of it.

[elgordo38]

I worry about this newspaper. First we have the delusional

Thai economy unaffected by weakening Yuan

and now we have the opposite - only on steroids.

Thailand's economic nightmare?

Equally delusional.

Yes the Yuan devaluation will create some headwinds for Thailand (as well as for other countries) but no - it does not mean that the world is ending or that the auto industry will decamp to Vietnam.

Read the section in a previous thread that Mexico wants to put a clause in the TPP that signatories must buy from other signatory countries. That means that Japan could not buy car parts from Thailand. Vietnam is the huge winner in all of this with its low wage docile work force and open for business attitude. You might want to give that word delusional a little more thought. I do not think that China is finished yet in their devaluation process. Some predict it could eventually hit 10% which is indeed a big change. Possibly a Black Swan event in the making.

[zakk9]

Read the section in a previous thread that Mexico wants to put a clause in the TPP that signatories must buy from other signatory countries. That means that Japan could not buy car parts from Thailand.

A provision like this would be totally unacceptable to any commercial entity and to most nations. It would eventually reduce the support for the agreement to a level where it would be canceled all together, if common sense hasn't done that before they have gotten that far.

[Jonmarleesco]

'Basically, what China is doing is exporting deflation.' More like slowing inflation than deflation; for the present, anyhow.

[Srikcir]

"what China is doing is exporting deflation"

It is clear that China's plunging yuan is going to adversely affect the Thailand economy. It might even derail the dual rail project.

Last year China referred to Thailand as its brother, emphasized its long relationship with the Thai people, and signed both a security and trade agreements. Wouldn't it reasonable then that China would have informed Prayut in advance of its intention to deflate the yuan? Perhaps as a trading partner and brother-in-arms discussed ways to largely insulate the Thai economy from such currency deflation?

But it doesn't seem China gave its newest ally any warning. Basically China has sneaked attacked the Thai economy. If this is the kind of value the Chinese government places on its security and trade agreements, the Prayut government best be considering new relationships or renewing trusted old relationships.

But given the political division Prayut has created with Western, Asian and Pacific democratic partners, a shift away from China may place the Junta in a political deadend. And the bottom line to the Junta's agenda has been its hold on power. Prayut's answer to this dilemna may be to react with greater restrictions on Thai people's rights and liberties.

[NCC1701A]

You can rent/buy/lease a nice house on a acre with your own garden and fish farm for next to nothing and wait it out. Can't have guns like in the USA but you get the idea. Nice to know more people are waking up to what is coming. Good luck everybody. You are going to need it.

[Whyamiandwhatamidoinghere]

Let it rain...