China reopening and impact on Thailand’s economy
Executive Summary:
- China lifted its zero-Covid policy in early December and started to reopened its borders in early January this year, sooner than we expected (mid-2023). Life is starting to return to normal in China after the government lifted the zero-Covid policy; we might see revenge spending soon but it would not be as aggressive as in the US. Production in China has been halted temporarily by an uptick in new Covid-19 cases but will resume soon. In the absence of Zero-Covid restrictions in China, the global supply chain disruption will continue to subside.
- China’s reopening is unlikely to cause a surge in domestic inflation. However, the impact on global inflation is more complicated, depending on how quickly demand regains ground in China. We expect China’s reopening to have limited impact on global inflation.
- China’s sudden reopening will boost growth in many sectors of economy and in many countries, led by tourism in Asia.
- In Thailand, the tourism sector is dependent on Chinese tourists which accounted for the largest share of tourist arrivals as well as tourism receipts in 2019, before the pandemic.
- We project a sharp increase in inbound Chinese tourists in 2Q23. We also project total foreign tourist arrivals would surge to 25-28 mn in 2023 from 11 mn in 2022.
- Higher spending by Chinese tourists will provide opportunities for Thai businesses in Shopping & Souvenirs, Accommodation, and Food & Beverage sectors.
- Thailand’s key exports to China are expected to gain traction, especially products that are relatively elastic to Chinese demand, but gains would be limited for some export items, including fresh, frozen & dried fruit, rubber products, cars & parts and computers & parts.
- Looking at FDI (foreign direct investment) in Thailand, direct investment by Chinese investors has been promising. They accounted for the largest share of applications (by investment value) for BOI incentives in 2022, led by investments in electric vehicles (EVs), clean energy, data centers, and electronics. Despite the pandemic, FDI from China has also increased, which would help to promote medium- and long-term economic growth in Thailand.
Life has started to return to normal in China; expect revenge spending soon but it might be less aggressive than in the US
There has been a resurgence in Covid-19 cases since China lifted its Zero-Covid policy in December but travel between major cities has recovered, some exceeding pre-pandemic levels. We expect that to be followed by a strong recovery in consumer spending. However, pent-up demand would be limited by the wealth effect (spending will be cautious as asset values drop). Unlike in the US in 2021, there are no signs of substantial improvements in China housing prices, savings rate, and stock market performance since reopening.
Production is halted temporarily by resurgence in Covid-19 cases but will resume soon and global supply chain disruptions will continue to subside
Despite the resurgence in Covid-19 cases, supply-side activity remained close to lows seen during the Shanghai lockdown last April. This suggests the Zero-Covid policy has caused some damage but it will not get worse. In the absence of widespread lockdowns, manufacturing activity will improve from Q1. And, even if there are sporadic production disruptions in Q1, global supply chains are unlikely to be affected in the near-term due to high levels of finished goods inventories and lower transportation cost (lower freight prices since lifting Zero-Covid policy). Production in China would accelerate after Q1 and help ease global supply disruptions the rest of this year.
China reopening is unlikely to cause a surge in domestic inflation, but the impact on global inflation is more complicated
Inflation had peaked during the Shanghai lockdown in mid-2022, which disrupted global supply chains. However, the disruption triggered by the resurgence in Covid-19 cases recently had minimal impact on inflation in December and it could ease in 1Q23 as manufacturing activity normalize in most industries. China’s production will return to normal in 2Q23, in time to meet rising domestic demand. This trend is expected to continue throughout 2023, which means China would not experience a surge in inflation this year.
Improving supply chains after China reopening will ease global inflation; low-medium risk of an acceleration in global inflation
China’s sudden reopening is set to offer a boost for growth in several angles of economies and countries, led by tourism in Asia
In Thailand, tourism sector is dependent on Chinese tourists; they accounted for largest share of tourist arrivals and tourism receipts in 2019 (pre-pandemic)
Excluding Hong Kong and Macao, about 11 mn Chinese tourists visited Thailand in 2019 (27% of total tourist arrivals), before the COVID-19 pandemic hit. They generated THB543 bn worth of tourism receipts or 28.1% of total tourism receipts.
Arrivals from China will surge in 2Q23; we project total foreign tourist arrivals to surge to 25-28 mn in 2023 from 11 mn last year
Latest surveys show Thailand remains a popular tourist destination for Chinese tourist. The recovery in Thailand’s tourism sector would also be triggered by the China’s decision to allow outbound group tours to 20 countries including Thailand, starting February 6th. Some of Thailand’s tourism competitors in the region such as South Korea, Japan and Vietnam have yet to be included on the list. However, limited flights out of China currently suggests a surge in Chinese tourists from 2Q23. Following China’s decision to reopen its borders since January 8th, we have revised up 2023 forecast for foreign tourist arrivals to 25-28 mn from 22.7 mn.
Higher spending by Chinese tourists will provide opportunities in related industries such as Shopping & Souvenirs, Accommodation, and Food & Beverage
In 2019, foreign tourists in Thailand spent 5,712 baht per person per day. This was led by spending on Accommodation (28.5%). Spending by Chinese tourists averaged 6,118 baht per person per day in Thailand, with the largest shares spent on Shopping & Souvenirs (31%), Accommodation (25%), and Food & Beverage (19%).
Anticipated pent-up demand from China could support some Thai exports amid weaker demand from the US and Europe
In 2022, Thailand’s total exports grew by 5.5% but exports to China fell 7.7% as the zero-COVID policy had limited output and suppressed consumer demand there. China’s reopening has spurred hopes trade would recover, but Thai exports could continue to face headwinds this year from a more pronounced slowdown in the global economy, especially in the US and Europe.
Export of key products to China will rise, especially those with relatively-high elasticity to Chinese demand, but gains would be limited for some items
Only four of Thailand’s top 10 Thai exports to China - Fresh, frozen and dried fruit, Rubber products, Cars & parts and Computers & parts – registered strong elasticity (>1) to China’s GDP growth. That means if pent-up demand in China returns to normal, exports of these products would gain traction. However, the projected gains in Thai exports will be limited to some sectors only.
Chinese direct investment in Thailand is encouraging; they accounted for the largest share of applications for investment incentives in 2022
In 2022, Thailand’s Board of Investment (BOI) reported foreign companies applied for BOI privileges valued at THB434 bn, rising 36% from a year earlier. China was the top investor. The industries targeted by investors were electric vehicles (EVs), clean energy, data centers, and electronics.
Despite the pandemic, FDI from China has surged; this would promote the growth of key industries in Thailand in the medium-to-long term
Foreign Direct Investment (FDI) from China to Thailand will improve, especially in sectors which have been a consistent recipient of Chinese investment, such as Rubber & plastics products, Motor vehicles, trailers & semi-trailers, Financial & insurance, and Wholesale & retail trade.
FDI inflows from China (2016 to 9M22)
Key takeaways:
- Tourism: Thailand remains a popular tourist destination for Chinese tourists and arrivals from China will rise following the decision to allow outbound group tours to 20 countries including Thailand, starting February 6th.
- Recovery in the tourism sector will only accelerate from 2Q23 given limited flights from China currently.
- More opportunities for related industries such as Shopping & Souvenirs, Accommodation, and Food & Beverage.
- Trade: Anticipate gains in four of the top 10 Thai exports to China - Fresh, frozen & dried fruit, Rubber products, Cars & parts, and Computers & parts; overall export growth would be limited by the still-weak global economy
- Chinese investment in Thailand: Chinese investors accounted for the largest share of applications (by investment value) for BOI privileges in 2022 led by the following industries: electric vehicles (EVs), clean energy, data centers and electronics
- Foreign Direct Investment (FDI) from China: positive for businesses in Rubber & plastics products, Motor vehicles, trailers & semi-trailers, Financial & insurance, and Wholesale & retail trade, will promote growth in the medium-to-long term.
- Major concerns:
- Chinese aviation activity would take time to recover given tight labor conditions in that industry.
- Global inflation would accelerate if a surge in Chinese demand offsets the slowdown in major economies.
- Despite the recovering tourism sector, domestic income will be concentrated in only 5-6 provinces in Thailand.
- Risks of labor shortage and higher labor costs would raise costs for businesses and limit growth in the tourism sector.
- Currently, tourists (such as those from India) continue to be subject to tight requirements (e.g. Covid tests) upon returning to their home countries due to lingering concerns over a resurgence in Covid-19 cases.