US embassy cable - 05BANGKOK4780

UNCLAS BANGKOK 004780 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA 
COMMERCE FOR 4430/EAP/MAC/OKSA 
 
E.O. 12958: N/A 
TAGS: EFIN, ETRD, ECON, CH, TH 
SUBJECT: CHINA REVALUES; THAI BUSINESS SHRUGS 
 
REF: 04 BANGKOK 8292 
 
1.(U) In response to the July 21 revaluation of the Chinese 
Yuan, and following a July 22 Thai bank holiday, the Thai 
Baht appreciated against the US$ by about 1.6 percent, from 
an average interday rate of  42.09/US$ on July 20 to 
41.38/US$  on July 26.   Similarly the Stock Exchange of 
Thailand (SET) index closed at 650.04 on July 20 and gained 
9.6 points (1.5 percent) by the close on July 25. 
 
2. (SBU) On July 26 both the Baht and SET weakened in the 
wake of profit taking and more careful consideration of the 
near-term effects of the Chinese move.  We have spoken with 
more than forty companies, bankers and academics and while 
most acknowledge that the revaluation is a step in the right 
direction,  they believe it is too soon to tell how much the 
Yuan will actually be allowed to appreciate and over what 
time frame. One Thai banker argued that the Chinese move is 
simply "an effort to get the U.S. off their backs" and that 
"nothing practical will change for some time."  Another said 
that he expects no further Yuan appreciation for "at least 
six months" while the Chinese consider the effects of the 
initial action.  All believe that a 2.1 percent appreciation, 
netting to about 1 percent when considering the appreciation 
of regional currencies against the US$, is far too small to 
have any impact on Thai trade. None of the companies with 
whom we spoke plan any changes or expect any particular 
impact on their business. The only strongly positive reaction 
was from a Thai Airways official who voiced hope that as the 
Yuan continues to strengthen, more Chinese tourists will 
visit Thailand and company operations in China will grow more 
profitable due to positive currency translation. 
 
3. (SBU) Both private and Bank of Thailand analysts agree 
that the timing and method of the revaluation was designed to 
minimize the effect of the currency move. They point to the 
action taking place in mid-summer, when currency trading is 
slower, at a period when the US$ was appreciating and the 
outlook was for continued Federal Reserve interest rate 
increases and positive US economic growth; all factors 
supporting continued strength in the greenback. Relative to 
the Baht, most local currency traders argue that the 
revaluation broke the downward momentum of the Baht but that, 
unless there is further Yuan appreciation in the next month 
or two, the Baht's movements will again be determined largely 
by Thai macroeconomic conditions. In any case, none felt that 
the Baht would soon break the Bt40/US$ level last seen in May. 
 
4. (SBU) On the other hand, RTG officials are using the 
revaluation of the Chinese Yuan to talk up prospects for the 
Thai economy in a bid to counteract increasing negative 
business and consumer sentiment over the near term economic 
outlook.  Following a July 22 meeting of the Ministers of 
Finance and Commerce and the Governor of the Bank of 
Thailand, Finance Minister Somkid told the press "the Baht 
has strengthened less than the Yuan, so it will benefit Thai 
exports."   Central Bank Governor Pridyathorn said the 
revaluation will make it "easier to implement our monetary 
policy since the Chinese chose a managed float system." 
Commerce Minister Thanong noted that the one percent 
appreciation of the Baht against the US$ on July 22 was less 
than the appreciation of other regional currencies that day 
and was therefore a positive indicator for Thai exporters. 
 
5. (SBU) Comment:  The general attitude in Thailand's private 
sector is that the Yuan needs to appreciate at least another 
10 percent before Thai companies realize any advantage 
against their Chinese competitors. They believe such 
appreciation is unlikely any time soon since they ascribe the 
July 21 action to a political rather than an economic 
decision by the Chinese authorities and expect that further 
Yuan appreciation will again be modest and based more on 
politics than economics. 
BOYCE