"Private investment has not yet recovered, partly because of the China factor," Bank of Thailand Governor Tarisa Watanagase said recently. She said Thailand's capacity utilisation had been 75 per cent for a reasonable period and that this should have led to new investment like it always had before.

Investors now fear an inability to compete with China, so they are reluctant to put fresh investment into Thailand, she explained.

Cheap labour, a vast market and greater political stability than Thailand have drawn many multinational companies to China since it opened up its economy in recent decades. It also remains the most attractive country for foreign direct investment.

The landscape of economic links between China and the rest of East Asia has been changing constantly, and the speed of change is now accelerating.

World Bank economic adviser Shahid Yusuf recalls the economic symbiosis between China and Southeast Asia from 1994 to 2004, when the trade balance favoured Southeast Asia. At that time, the rest of East Asia produced and exported components, capital goods and raw materials, while China focused on assembly.

Now, Yusuf wonders whether the symbiosis will persist or begin to dissolve. The manufacture of components and capital goods is shifting to China, in order to take advantage of proximity to assemblers.

Moreover, research and development activities are being located in China, and foreign direct investment in upstream activities continues.

He says he is concerned about the impact on Thailand and other Southeast Asian countries and warns there is a real threat to Thailand if its economy is not resilient to new regional arrangements.

Another serious threat from China comes from currency-exchange rates. The value of the yuan is virtually fixed to the US dollar, allowing only a narrow band of change against the greenback.

The United States has complained that China is keeping the yuan at an artificially low value, leading to a huge US trade deficit with China and low costs for Chinese export goods, making them cheaper than those of its competitors. In reality, however, the US - the world's largest economy - feels far less impact from the low-valued yuan than Thailand does, when the implication of the yuan's value on Thailand's competitiveness is taken into account. Thai policy-makers know the problem well, but can do nothing about it, because Thailand is a relatively small and weak economy.

The floating baht has come under intense pressure from the weakening dollar. Many observers - including Deputy Prime Minister and Finance Minister MR Pridiyathorn Devakula - believe the central bank may not have needed to impose its capital-control measure last December if the yuan exchange rate had been allowed to float. The consequences of the bank's effort to halt the baht's rise in order to maintain the competitiveness of Thailand's export sector was a stock-market tumble of more than 108.41 points, or 14.84 per cent in a single day, on December 19.

When China joined the World Trade Organisation in 2001, policymakers and economists believed China would offer Thailand more opportunities than threats. The exchange rate was not a serious issue then.

With the dollar's value falling recently, the baht's has risen rapidly. But the value of the yuan has remained almost stable, bringing tremendous pressure on Thailand as capital flowed into East Asia.

The International Monetary Fund noticed the problem of exchange rates creating an imbalance between East Asia and the US, causing a current-account surplus for the former and a deficit for the latter. But it failed to mention the possible affects on a small country like Thailand.

The conventional recommendation for Thailand is that it should move up to value-added industries. But that is easier said than done. At the very least, it will take time, and the process will probably be turbulent.

It seems that being less attractive to investors and suffering a rising exchange rate, Thailand is backed into a corner.

Can we escape from this predicament? Some think we can.

"I believe our economy is more flexible than Yusuf thinks. Of course, many industries will disappear, but new ones will emerge," says Thailand Research Development Institute economist Somchai Jitsuchon. "Looking at the next 10 or 15 years, the Thai economy will become similar to what Taiwan and Malaysia are today."

Taking into account the many negative factors that Thailand is now facing, including competition from India and Vietnam, few people would agree with Somchai. Even if he is right, the emergence of new industries and services would be unlikely to make up for the pace at which sunset industries would drop out of business or move their factories to China.

It seems highly possible that the impact of the capital controls last December will fade in significance compared with the economic turbulence now looming on our horizon.

Wichit Chaitrong

The Nation