Cablegate: Thai Markets Update: China Currency Policy At

VZCZCXRO1045
OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #7550/01 3551013
ZNR UUUUU ZZH
O 211013Z DEC 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3581
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 3407
RUEHKO/AMEMBASSY TOKYO PRIORITY 8670
RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 2870

UNCLAS SECTION 01 OF 02 BANGKOK 007550

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB
TREASURY FOR OASIA
COMMERCE FOR EAP/MAC/OKSA
STATE PASS TO USTR FOR WEISEL
STATE PASS TO FEDERQAL RESERVE SAN FRANCISCO FOR DAN FINEMAN
STATE PASS TO FEDERAL RESERVE NEW YORK FOR MATT HILDEBRANDT

E.O. 12958: N/A
TAGS: EFIN ECON CH TH
SUBJECT: THAI MARKETS UPDATE: CHINA CURRENCY POLICY AT
FAULT?

REF: BANGKOK 7504 AND PREVIOUS

BANGKOK 00007550 001.2 OF 002

1. (SBU) While the Bank of Thailand has lifted the 30 percent
reserve requirement on foreigners investing in Thai equities,
the restriction remains in place for debt instruments. The
President of the Thai Electronic Bond Exchange (a subsidiary
of the Stock Exchange of Thailand) told the press that if the
BoT policy regarding debt markets is not reversed "...the
bond market will collapse." He continued, "The effect of the
BoT policy is to make the bond market less active....and
market sentiment is pushing up long-term yields." Kongkiat
Opaswongkarn, CEO of Asia Plus Securities and President of
the Thai capital Market Association, said that these views
were "a bit extreme" but noted that the cost of capital in
Thailand was certainly going to be higher than it was prior
to December 19, although it was hard to say how much more
expensive. A Standard and Poor's analyst has said that the
new capital controls "will lead to higher funding costs in
the Kingdom, with negative implications for the prices of
debt and eq
uity assets."

2. (SBU) With the RTG anticipated to run a budget deficit of
Bt146 billion (US$4 billion) for the coming fiscal year to be
financed through the issuance of Treasury bills and bonds,
the increased capital costs will directly affect the
government budget going forward. For the private sector,
increased risk premiums means that it will probably be more
difficult to raise new equity, the cost of debt will be
increased and liquidity in both markets reduced. These
factors, plus the general malaise in the domestic economy,
will pressure the BoT to reduce its policy rates at their
January meeting. In the interim, f/x traders report the BoT
is actively selling baht for US$ and with the lower liquidity
in domestic f/x markets, having some success in weakening the
baht which was trading at around 36.1/US$ around midday, from
35.7 yesterday evening.

3. (SBU) With the immediate crisis thought to be at bay,
several market observers, including the BoT governor, have
remarked both in the press and privately that the source of
Thailand's strong baht situation is not just speculators
reportedly piling into the currency. They note that Thai
monetary authorities have fewer tools at their disposal (or
are more committed to relatively free currency markets) than
other nations in the region including Taiwan, Japan and
especially China. The Taiwan dollar and Yen have not
significantly moved against the US$ this year and the Yuan
has appreciated only about 5.5 percent despite huge dollar
inflows. With China the source of competition for many Thai
exports and foreign direct investment, the Thais are most
concerned at the slow rate of Yuan adjustment to US$ weakness.

4. (SBU) BoT Governor Tarisa is quoted as saying that the
problem of global trade and currency imbalances is widespread
and "if this sort of problem is not cured in a cooperative
manner...each country will have to find a way to take matters
into its own hands." Exporters and capital market
participants have separately told econoffs that the
inflexibility of the Chinese currency is a major problem for
both Thailand and the US. Kongkiat told us that he will
encourage the RTG to work with ASEAN to press the Chinese
government to allow the Yuan to appreciate more rapidly.

5. (SBU) Comment: Cynics may deride Governor Tarisa's
comments as an attempt to deflect attention (criticism) from
her own dubious management of the baht issue. There may be
some of that, but an increasing number here agree with her
basic complaint. While unwelcome, the current problems have
the potentially salutary effect of focusing the RTG on what
may be regarded as the root cause of the Kingdom's
slow-motion decline in export competitiveness -- the rise of
China. There is a consensus forming in Thailand that some of
China's competitiveness is due not so much to any natural
comparative advantage as to currency manipulation, and that
Thailand can no longer afford to be passive or fatalistic on
this point. We believe that Thailand, either by itself or in
coordination with ASEAN, may be ready to work with the USG

BANGKOK 00007550 002.2 OF 002

and others to press China for greater currency flexibility.
As a first step, the US should consider extending an offer to
the RTG's Finance Ministry and the Bank of Thailand to be
briefed by their US counterparts on the recent US mission to
China led by Treasury Secretary Paulson. Such a briefing
could be combined with an exchange of views on how the US and
Thailand could best cooperate in seeking progress on this
issue.
ARVIZU

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