On the 40th anniversary of the establishment of diplomatic relations between Thailand and China a new economic era is in place to fortify a unique relationship built on ancestral roots and business ties
The date is July 1, 1975. The Thai Airways jet is loaded with the country’s leading politicians and businessmen. The pilots are nervously checking the flight plan. It is not a route they are used to flying, though they soon will be. This prestigious, landmark flight is headed for Beijing, where Thailand and China are slated to open diplomatic relations. It will be many years yet before Deng Xiaoping is ready to unveil the Open Door Policy, and China is still emerging from the Cultural Revolution, but the Kingdom of Thailand sees promise.
Prime Minister Kukrit Pramoj is on board to lead the Thai delegation to Beijing. The Prime Minister has come armed with gifts for the Chinese leaders and ready to add cheer to the post-signing celebration. In the cargo hold sits 200 ripe and ready Durians, 50 packs of Samit Virginia cigarettes, dozens of Tara and Mekong whisky bottles, cases of Singha beer and colorful bouquets of fresh flowers. The Thai entourage knows that it will be a moment of indulgence for those in Zhongnanhai without easy access to these luxury items.
Following years of negotiations, China had finally sealed an agreement with the Kingdom of Thailand to formally establish diplomatic ties between Bangkok and Beijing. Even now, there are still lingering memories of that fateful journey. In fact, perhaps as a legacy to the forethought of the Prime Minister, only Thailand is permitted to ship fresh durians into China. All other countries must ship their durians frozen to the Mainland.
In this part of the world, blood runs deeper than trade in many cases. There is no doubt the Chinese diaspora is both thriving and multiplying in Thailand. The Thai Chinese population exceeds 9 million or some 14% of the population and nowhere are there more Chinese residing outside China. Of all the overseas populations living around the world, perhaps the Thai Chinese have been able to assimilate most into the local culture.
Many leading Thai families today are descendants of Chinese families. One study claims that some 40% of the Thai population has some Chinese ancestry and Thai Chinese dominate business, politics, finance and the professional classes. Historically, Thai kings have welcomed the business activity that Chinese merchants have brought to Thailand. In fact, two of the greatest warrior kings are of part Chinese descent – King Taksin and King Rama I (see box).
Today, the business flow between Thailand and China is large – and getting larger. Enterprises are closing impressive deals that witness billions of dollars shuttling between the nations. Technology and trade exchanges are blossoming, and, on the eve of the 40th Anniversary of that famous diplomatic tie-up, China and Thailand are pledging to build the 21st Maritime Silk Road network.
Nothing epitomizes the nature of this key relationship like a look at the highlight deals between the two nations. The list starts with the illustrious Charoen Pokphand (CP Group). The first foreign investor to China (see box) closed two mega-deals in the last three years. CP paid US$9.4 billion to HSBC for a 15.6% stake in Ping An Insurance, one of the world’s largest insurers, in a transaction that surprised the finance world. Then, early this year, CP announced a US$10.4 billion co-investment with Japan’s Itochu Corp. for a 20% stake in China International Trust and Investment Corp. (CITIC Ltd.), one of the country’s largest financial groups.
The CP deals show the clout of the Thai elite in China, but the tide flows both ways. The China Mobile purchase of a 18% stake in True Corp. for US$881 million represented the first large M&A deal in Thailand since the military coup and the second major foreign deal for China Mobile, following its acquisition of Pakistani carrier Paktel in 2007. True CEO Suphachai Chearavanont, son and heir apparent to the global CP Group, reckons that the partnership with the telcom giant has positioned True at “the forefront of the ASEAN digital community.”
It would be hard for True to find a bigger partner: China Mobile boasts the largest subscriber base in the world at over 810 million. With declining profitability since second half 2014, investors have pressed the giant state owned enterprise (SOE) to invest its large cash reserves to better compete with smaller rivals. The number of True subscribers (29 million) may have little impact on China Mobile’s bottom line, but exposure to True’s diversified offering of fixed broadband, Wi-Fi and Pay TV is a longterm play to counter the saturated China market.
One deal that is not in the spotlight, but presents an interesting perspective on business relations is China Union Pay International’s decision to start with Thailand in order to take its bankcard global. This August, UnionPay announced a deal with Thailand Bankers Association (TBA), confirming the chip card of UnionPay will be introduced to the local banks as the standard for the banking industry. The Kingdom is now the first overseas nation to adopt UnionPay as its local standard. The cards will be accepted by nearly all local ATMs and about 70% of merchants.
The deal was highly anticipated after a review last year by TBA and commercial banks favored UnionPay as the standard. “This is a milestone for financial cooperation between China and Thailand,” stated Ge Huayong, Chairman of UnionPay International. “Through this agreement the Thai banking industry upgrades from magnetic strip to chip and reaches compatibility with the international standard. This lays a solid foundation for innovative applications and value added services to optimize the experience of cardholders.”
Even the Thai Navy got involved in the China deal frenzy a week before the diplomatic celebration, announcing it would buy three submarines from China costing US$355 million. Thailand has not had a submarine in its fleet since 1951. The decision to buy from China is based on a value proposition that includes low cost, military technology transfer and free training.
The celebration of 40 years of diplomatic ties took place in Bangkok this year, and there was much discussion on how a special relationship has formed. Relations between the two countries have come a long way, and a new economic integration is emerging as a central theme for bilateral ties. The all-important China- Thai 2003 Free Trade Agreement covering agricultural products witnessed Thailand’s trade with China soar to 12% of total exports in 2013 compared to just 3% for 15 years ago. Last year, China Premier Wen Jiabao set an ambitious target to boost bilateral trade to 15% within five years.
Since China joined the World Trade Organization in 2010, Thailand has been one of the most enthusiastic bilateral traders in the ASEAN group. That same year, China overtook the US to become Thailand’s largest export partner, and its second largest source of imports after Japan. “China is investing an incredible amount of energy in Thailand,” according to Ernie Bower of the Center for Strategic and International Studies. This energy has seen bilateral trade between the countries grow from US$1.5 billion in 1991 to nearly US$64 billion in 2014.
Already signed agreements will see 2 million tons of rice and 200,000 tons of rubber shipped into China from Thailand this year. The financial sector in both countries will benefit from loans to finance infrastructure projects as part of China’s OBOR project for highspeed rail, port modernization and the Kra Canal. This will play a large part in stimulating Thailand’s economy. Port modernization and the canal will allow ships transit from the Indian to Pacific Ocean to bypass the piracy-prone Malaccan Straights, shortening the trip by 1,200 km or two to five days and saving $350,000 of fuel per trip.
China is well aware that the ASEAN countries are on the rise. In the first 6 months of 2014 one-third of all merger & acquisitions in Asia Pacific took place in Southeast Asia, or 16 deals worth at US$16 billion. Located in the middle of ASEAN, Thailand is most likely to become a hub of economic activity with the completion of a new high-speed rail system connecting Singapore to Kunming. This can only bring more business and income flow through the Thai hub.
“Another plus is that Thailand has a relatively robust investment environment,” states Wharton professor Philip Nichols. “Thailand is well regarded among business people for its low regulatory burden, and a low regulatory burden usually means less corruption.”
Nonetheless, there are cracks in the bright picture of Thai-China relations. Exporters now carefully monitor the slowdown of China’s economy. According to Amonthep Chawla, CIMB Thai Bank research head, even a best-case scenario could reduce Thai exports 3% to 4%. The latest depreciation of the yuan gives exporters more cause for concern. “Depreciation will have a short term impact on market sentiment,” notes Chantavarn Sucharitikul of Bank of Thailand, “but the longer term impact must be assessed.” Clearly, a weaker yuan reduces the Thai advantage over Chinese goods in the long term.
Nowhere is the growing importance of the yuan currency more evident than on the beaches of Phuket and Ko Phi Phi, as Chinese language restaurants and shops have popped up along boardwalks and markets. Chinese sightseers replaced sunburned Brits as the major source of holiday dollars, comprising 20% of all international arrivals. As disposable incomes increase, tourism surges. Some 4.6 million Chinese tourists visited Thailand in the first half of 2015. By year’s end the figure will have reached a record 6 million.
The Chinese have proven more willing to open wallets than European counterparts, spending on average US$150 a day, and contributing an expected US$5.6 billion to the Thai economy in 2015. Some see these tourist dollars as useful for a Thai government faced with poor growth rates in most sectors. The Thai “tef lon” economy has proven resilient over the past two decades, rebounding from changes in government, natural disasters and two financial crises. However, in 2015 analysts wonder whether the resilience can last.
“Tef lon Thailand Starts to Flake,” announced the Bangkok Post in April 2015. Credit Suisse predicted 2014 GDP growth to hit 4.5% and many other analysts called for a higher figure. Thailand fooled everyone by delivering growth of 0.7% in 2014, the lowest in the region. Singapore was second lowest at 2.9%, but neighboring Laos and Malaysia posted figures of 7.5% and 6% respectively, while the Association of Southeast Asian Nations (ASEAN) average reached 5.2%.
Some blame falls on the failed rice subsidy of the Yingluck Shinawatra government. Combined with a severe 2014 drought in the northern provinces, the subsidies may see Thailand lose its position as the world’s leading rice exporter. Under the scheme, the government bought rice from farmers, offering subsidies up to 50% above market price. When global prices dropped, the government was faced with losses of US$15.4 billion. Rather than realize these losses, Thailand stockpiled some 14 million tons of rice. “Selling current rice stores will take seven or eight years,” announced the Thai Rice Exporters Association.
The failed subsidy scheme was one reason the military took control and political instability brings its own risks. The May 2014 coup spooked tourists and investors and caused countries to re-examine deals made with the previous government. Looking at data from a number of countries, Paul Collier, an Oxford economics professor, calculated that on average a coup slows the growth of national economies 2.1% in the first year. The 2014 decrease in Thailand was 2.2%, within touching distance of Collier’s predictions. The cumulative effect over three years is equal to a 7% reduction in personal income.
Political instability prevents serious examination of deeper issues. “What we are seeing are the effects of neglecting investment in the infrastructure required for sustainable economic growth,” said Shawn Crispin, a China-Thai expert at The Diplomat in Bangkok. Infrastructure neglect puts economies at risk of losing competitiveness, especially those involved in advanced manufacturing – computer related products make up 10% of Thai exports.
Thailand is part of China’s supply chain for computer components. Chinese assembling plants with over 80,000 workers finish 20 million laptops and 15 million tablets for companies like Hewlett Packard every year. Catastrophic 2011 flooding exposed Thailand’s infrastructure vulnerability. Two-thirds of Thai provinces suffered, registering US$49 billion in damages. The regional supply chain to China was disrupted, thus seriously decimating Thai computer component capacity.
Tail of Competitiveness
Hewlett Packard cited a “30% difference between global supply and demand” in HP products caused by the flood created scarcity. A 7% revenue and 44% profit decline for HP resulted in 2012. More infrastructure investment for roads and rail with enhanced flood protection can mitigate such losses. China’s Silk Road initiative targets this type of infrastructure fragility to fortify economic integration between Thailand and China.
The HP case reveals a weakness in Thailand and China’s economic relationship. For instance, Thailand specializes in hard disk drives, supplying roughly one-quarter of global production. As new computer products rely less on hard drives, Thai factories may slip down the value chain. Without adequate investment, and the lowest English proficiency in the region, the Thailand is much less competitive.
Vietnamese companies recently beat Thai bids to manufacture electronics for Chinese companies. Multinationals are shifting operations to cheaper locations. Thailand’s minimum wage of about $8 a day is high for the region. Vietnam’s infrastructure is improving and average incomes are 2.5 times lower than Thailand; in comparison, Cambodia’s average is 5 times lower.
Thailand’s high-end production of technology items is being replaced by basic industries. This presages a drift down the value chain as Thailand succumbs to competitive neighbors and squabbling politicians. Thailand risks “becoming stuck in a middle income trap,” says Crispin. The economy remains a resource exporter vulnerable to commodity price shifts and producers cannot climb the value-add chain like Taiwan, Japan, South Korea and China have done.
Though precariously perched Thailand will find its way. It is the second largest Southeast Asian economy and has a good score on Global Competitiveness Index published by World Economic Forum. In 2015, Thailand ranked 31 out of 144 nations, while Malaysia was 20 and Singapore second. The country has a young upbeat population with an international outlook and is an important bridge to Southeast Asia. Finally, this resilient nation is ready to play its next China card, one that could well provide an economic solution to its ills. After all, the Teflon Economy always bounces back.