The result of efforts by the People's Bank of China to slow down its sizzling economy may have an immense impact on the Thai economy, for which trade with China is an increasingly important factor in terms of export performance.

China has already become Thailand's fourth-largest market, with exports last year accounting for 9 per cent of all the Kingdom's overseas trade, doubling from 4.4 per cent in 2001. This is a result of rapid export growth to China of 33.1 per cent on average over the past five years - far higher than the 14.9-per-cent growth of overall Thai exports.

The fourth-largest global economy also has an important influence on Thai imports, with its products ranking second in value. While the Kingdom's total imports grew an average of 15.8 per cent per year from 2002-2006, those from China expanded by an annual 29.6 per cent in the same period.

This represents an increase in China's share of Thai imports from 6 per cent in 2001 to 10.6 per cent last year.

The world is taking a close look at whether the latest series of measures from Beijing will be effective enough to cool down the overheated economy, wondering whether the bubble will burst with the impact spilling over into other countries, particularly in Asia.

If successful, a soft landing would prevent huge widespread damage to the global economy. The Thai economy would then not be significantly hurt by such a slowdown, but if the bubble remains and then bursts some day soon, the local economy would be severely affected in view of the current fall in domestic demand.

Any bursting of the Chinese economic bubble would have both a direct impact on the Thai economy as well as an indirect effect, as the Kingdom's trading partners would also be hurt. Financial markets and the foreign-exchange market would also inevitably be hit.

Titanun Mallikamas, a Bank of Thailand director, said China's economic situation needed to be closely monitored because its sustainability could help Asian economies, including the Thai economy, to grow smoothly. However, Asian economies would be adversely affected if the Chinese economy continued to swelter.

Former US Federal Reserve chairman Alan Greenspan recently sent a stern warning of a "dramatic contraction" in Chinese stocks, saying the recent boom was clearly unsustainable.

The Chinese economy has accelerated strongly over the past years and grew by a further 11.1 per cent in the first quarter, although its central bank has tried hard since 2004 to tackle the problem.

Chinese exports have grown 29.5 per cent on average over the past five years, and continue to pose an upside risk as they rose by 27.8 per cent and 26.9 per cent year on year in the first quarter and April, respectively.

Fixed asset investment rose by 25.9 per cent in April, higher than the government's target of below 20 per cent. M2 - the amount of money that circulates in the financial system, reflecting economic activity - increased by 17.1 per cent in the month, compared with a targeted 16-per-cent rise.

Rapidly expanding credit growth and a red-hot stock market are significant indications of a bubble. Loan growth in China has been on an upward trend, with a 16.5-per-cent increase in April.

The Shanghai stock index has broken ceilings several times, as property-price growth has been rising. "It is a symptom we have to be cautious about, because it has caused an economic imbalance. The Chinese economy could continue to overheat next year when Beijing hosts the Olympic Games," said Titanun.

The Chinese central bank has tried hard to slow its economy by lifting interest rates and reserve requirements, as well as widening the yuan trading band against US dollar. However, it has been unable to stop the "irrational exuberance".

The deposit rate is 108 basis points higher and the lending rate 1.26 percentage points higher since October, 2004. The reserve requirement has been raised by four percentage points, to 11.5 per cent, since June 16 last year.

Markets are looking to whether the Chinese central bank will allow its currency to move up and down in a wider band, after recently widening the band already to 0.5 per cent from 0.3 per cent. Some say that the yuan does not need to be stronger, but others believe in further appreciation of the currency.

The Bank of Thailand believes the baht may not move up to the same degree as the yuan, and that the stronger yuan could boost Thai exports.

No one can guarantee whether the baht will continue to go north amid limited market intervention with the central bank's international reserves of US$70.9 billion (Bt2.45 trillion). But China's foreign reserves of $1.2 trillion ensure it is capable of defending the yuan.

China has a crucial role, not only in trade with Thailand but also in the fierce competition between the two countries in third markets. 

Anoma Srisukkasem

The Nation