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