Joined at the hip

Joined at the hip

Thailand's prospects for exports and tourism are very much tied to China's outlook

Chinese tourists pose for a photographer inside a recently opened underground tunnel in front of the Grand Palace in Bangkok on Jan 17. Bloomberg
Chinese tourists pose for a photographer inside a recently opened underground tunnel in front of the Grand Palace in Bangkok on Jan 17. Bloomberg

The Thai tourism industry posted a disappointing result in terms of arrivals from China last year, recording only 3.5 million visitors, falling far short of the original goal of 5-7 million.

However, the government set an ambitious target of securing 8 million visitors from the mainland this year, banking on the visa-free policy, which is expected to be made permanent from March.

Beijing last week signalled its intention to revitalise foreign investment, with Premier Li Qiang delivering a keynote speech at the World Economic Forum in Davos, insisting China's economy can record a robust rebound.

After posting economic growth of 5.2% in 2023, which exceeded the state target of 5%, uncertainty persists regarding China's economy because foreign investment turned negative for the first time since 1998 in the third quarter last year.

In addition, a slump in the property sector is expected to take another two years to resolve.

Meanwhile, Beijing began aggressively encouraging its citizens to travel within the country during the pandemic, and this policy persisted as borders opened. The promotion could remain in place this year.

As a key driver for exports, investment and tourism in Thailand, China is expected to have both positive and negative influences on the local economy.

Thai tourism operators present their products to Chinese tour agents at an Association of Thai Travel Agents roadshow held in Shanghai last month. Molpasorn Shoowong

EXPORT CONUNDRUM

Sompop Manarungsan, president of the Panyapiwat Institute of Management, said he agrees with many economists that China's economic slowdown will affect Thailand's tourism sector and exports.

However, he said there is greater opportunity for foreign direct investment from China as the country prepares to move its production base to Southeast Asia amid geopolitical tension and higher domestic production costs.

Mr Sompop said China's GDP growth is projected to dip to 4.5% this year, which is a significant decline given the size of China's US$18-trillion economy.

Both exports and imports declined in China last year, indicating its post-pandemic economic recovery remained fragile throughout the year.

The country's exports fell 4.6% to $3.38 trillion and imports dropped 5.5% to $2.56 trillion year-on-year, according to recent data released by China's General Administration of Customs.

The trade partly reflects greater specialisation in production within Asia, with China now serving as the final processing and assembly platform for a large quantity of goods heading from other Asian countries to Western countries through the nation, he said.

These changes have shifted China's bilateral trade balances, based on rising commerce with industrialised Western countries as well as many Asian countries.

Furthermore, unprecedented global supply chain fragmentation has brought about an increasing trade imbalance between China and the US, said Mr Sompop.

China's exports to the US decreased by 13%, while its exports to Russia increased by 47%.

China is Thailand's top trading partner and the second-largest export market, representing 12% of Thailand's total export value.

When China's economy slows, it has significant implications for Thailand's exports, he said.

INVESTMENT UNDETERRED

Companies in China should continue to invest in Asean nations despite the slowdown, which was triggered by problems in the real estate sector, said the Federation of Thai Industries (FTI).

FTI chairman Kriengkrai Thiennukul said China's sluggish economy is likely to limit tourist arrivals from that country, affecting certain local industries related to tourism and services.

However, in terms of Chinese investment overseas, especially in the electric vehicle (EV) sector, it will continue to gain momentum, said Mr Kriengkrai.

"Investment is a separate issue from the economic downturn," he said.

Many Chinese firms seek new markets for expansion into Southeast Asia because of the market size and growth potential, while others want to relocate production facilities to this region to avoid US trade sanctions, said Mr Kriengkrai.

In addition, it is difficult for manufacturers from China to establish businesses in rival countries such as the US, he said.

"We are not worried about Chinese investment in Thailand. Investment in the EV business here keeps growing," said Mr Kriengkrai.

Chinese automaker Great Wall Motor (GWM) announced earlier this month it aims to grow its EV business in Asean after developing an EV production base in Thailand that is scheduled to start selling locally-manufactured cars in January.

The company is scheduled to announce a new business plan on Feb 9, detailing its investment budget and new car models to be produced at its factory in Rayong province, said Narong Sritalayon, managing director of GWM.

However, because China is the world's second-largest economy, the FTI needs to monitor its real estate crisis and whether its economy can revive this year, said Mr Kriengkrai.

"Many Chinese companies are facing liquidity problems, hampering employment and people's purchasing power," he said.

University graduates in China are struggling with the high unemployment rate and many have decided to seek jobs abroad, said Mr Kriengkrai.

Mr Sompop said China has been the world's factory for more than four decades, but that could change soon as manufacturers shift production away from the mainland as a result of the "China Plus One" strategy.

A combination of geopolitical tension with the US and rising costs have persuaded Chinese manufacturers to expand to Malaysia, the Philippines, Singapore, Thailand and Vietnam.

A trucks departs as another arrives at a checkpoint in Vietnam's Lang Son province en route to China's You Yi Guan checkpoint.

Between January and September 2023, China was the biggest investor in Thailand with 209 projects worth 83 billion baht, followed by Singapore, Japan, the US and South Korea.

Rising Chinese investment is being driven by the EV and electronics industries, including by companies such as Alibaba and BYD.

Pisit Puapan, director of the Fiscal Policy Office's Bureau of Macroeconomic Policy, said Thailand's exports to China have decelerated since last year, but durian exports still show promising growth.

The value of exports contracted in 2023 and the trend is expected to continue this year, said Mr Pisit.

He said the decline is partly attributed to China's renewed focus on stimulating domestic demand under its "dual circulation" strategy, aiming to reduce dependence on overseas markets and technology as part of its long-term development.

RECLAIMING TOP SPOT

Tourism arrivals from China could decrease this year as Beijing focuses on domestic travel, Mr Sompop said.

Thailand extended the visa-free policy to citizens from six other countries -- France, Germany, Italy, the Netherlands, Spain and Malaysia -- and established a mutual 30-day visa-free travel arrangement with Singapore.

The Chinese government aims to attract 300 million foreign tourists this year, a target it achieved prior to the pandemic. Some 210 million people visited the country in 2023.

However, Chattan Kunjara Na Ayudhya, deputy governor for international marketing in Asia and South Pacific at the Tourism Authority of Thailand (TAT), said authorities remain confident China will return to be the top source market for tourists this year, tallying 8 million arrivals and 320 billion baht in revenue, overtaking Malaysia and South Korea.

Mr Chattan said Thailand welcomes an average of 15,000 arrivals per day from China now, suggesting positive momentum for the rest of the year.

Despite the mainland's flourishing domestic tourism, Thailand remains the most preferred destination among Chinese nationals, he said.

Bookings from the country for the Chinese New Year festivities have been robust, driven by the visa-free programme, said Mr Chattan.

Average daily arrivals from China should increase to at least 20,000 during the holiday period, he said.

However, challenges remain with the market, as the economy is sluggish, hampering spending sentiment among potential Chinese tourists, even though Thailand is perceived as an affordable destination, said Mr Chattan.

"It will take some time for Chinese tourists to regain confidence for spending," he said.

Mr Chattan said the agency will promote more chartered flights connecting China's second-tier cities to Thailand, while working to increase the frequency of scheduled flights in major aviation hubs.

Chartered flights were organised to Thailand for the Chinese New Year holiday this year from second-tier cities such as Ningbo, Wuxi, Changzhou, Nanchang, Jieyang and Haikou.

One trend involves the Chinese visiting provinces in Isan after riding on the China-Laos high-speed train, or driving cars from China into Thailand to explore the northern provinces.

Visitors from China pose for photos on a beach in Phangnga province. REUTERS

Chuwit Sirivejkul, regional director of marketing for East Asia at TAT, said the process of issuing passports to Chinese citizens has improved since China reopened its borders a year ago, speeding up the procedure.

Sisdivachr Cheewarattanaporn, president of the Association of Thai Travel Agents, said the Chinese market would not reach the state goal of 8 million arrivals without proper stimulus schemes in addition to the visa exemption.

He said the baseline projection for the Chinese market is 6 million arrivals.

Though the market is gradually improving and the outlook for the Chinese New Year holiday is upbeat, the decline in spending may continue to hinder tourism revenue, said Mr Sisdivachr.

The slumping Chinese economy is causing people to be more cautious about spending, he said.

"With fundamental travel costs rising 20-30% compared with prior to the pandemic, mainly thanks to higher airfares and hotel room prices, tourists are exercising stricter financial discipline, thinking twice before spending on food and shopping in Thailand," said Mr Sisdivachr.

"Before the pandemic, Chinese were known to be big spenders."

WEAKNESS TO PERSIST

Sornchai Suneta, first executive vice-president of investment and product function at Siam Commercial Bank, said it would be challenging for China to sustain economic growth of 5% this year, on par with last year.

"I expect China's housing market activities to continue to contract, but at a lower rate than in the past few years as the authorities have tried to manage the property downturn by supplying more social housing, especially in big cities," he told the Bangkok Post.

"The People's Bank of China pledged to increase targeted credit support for major projects."

However, the policy easing is not meaningful and lacks concrete measures to support consumption growth, such as large-scale cash handouts, so GDP growth will be moderate in the second half of 2024, said Mr Sornchai.

"I expect there's a greater chance the central bank of China will cut interest rates in the coming months as the US Federal Reserve is expected to do this year, pressuring banks' margins to ease after China's large banks cut time deposits in December amid concern about deflationary pressure," he said.

China's potential growth could slow in the coming years as the property sector remains a persistent drag, while elevated conflicts with the US have caused technology decoupling and geopolitical tension that accelerated global supply chain relocation, said Mr Sornchai.

However, he said China's equity markets remain attractive for investment, particularly in terms of valuation, positioning and investment opportunity in some sectors.

"From a valuation perspective, China's equity market de-rated substantially over the past few years, indicating the market already priced in a lot of bad news," said Mr Sornchai.

The de-rating of China's equity markets looks dramatic when compared with its own historical valuations and when compared with global markets, he said.

Therefore, a low valuation in China's equity market will help increase the chance of positive returns and limit downside on valuation, said Mr Sornchai.

Maybank Securities expects China's 2024 consumer price index and producer price index inflation to come in at 1.1% and 1.4%, respectively, below the pre-pandemic (2017-2019) averages of 2.2% and 3.2%, respectively.

"The lower-for-longer inflation outlook reflects fragile demand and lingering slack in the industrial sector," noted the brokerage.

"Discounting and price wars in the consumer-facing sectors such as e-commerce and electric vehicles also continued into the new year."

SLIGHT UPTICK IN EXPORTS

Sanan Angubolkul, chairman of the Thai Chamber of Commerce, predicted Thai exports to China to slightly expand this year, attributed to relatively weak Chinese purchasing power as the economy slowly recovers and the property sector is hobbled.

Thai exports, especially for products related to construction such as steel and metals, as well as agricultural products like cassava flour, are expected to remain flat this year, he said.

However, Mr Sanan said some export products are poised for growth in the Chinese market, such as internal combustion engines, aluminium products, natural rubber, and popular Thai fruit, particularly durian.

"Although China's economy is experiencing a slowdown, it's still the world's second-largest economy, the largest consumer market, and the second-largest export market for Thailand," he said.

"Expanding exports to China by just 1% could generate substantial economic value."

Furthermore, the future holds opportunities for Thailand to benefit from the high-speed rail project that will eventually connect Thailand with China via Laos. This presents a significant opportunity for Thailand to expand its export channels to the global market, said Mr Sanan.

"China remains a crucial market for Thailand's long-term export growth, despite the challenges in the global economy," he said.

In addition to China, Mr Sanan suggested Thailand needs to explore new markets that have potential for strong growth.

The chamber estimates an export contraction of 2-3% last year, with the Thai economy rebounding to post growth of 2-3% in 2024.

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