Thailand's stock market turmoil over the past two days is unlikely to have any immediate or dire impact on China, experts said.

 

Thailand, which sparked the Asian financial crisis in 1997, saw its stock market suffer its biggest single day drop in 16 years on Tuesday, triggered by a foreign currency policy change.

 

In a bid to rein in the baht, which has appreciated significantly this year, Thailand's central bank announced on Tuesday a set of rules to control the short-term capital inflows that it said has driven up the local currency.

 

The stock market's sharp fall prompted the government to reverse the policy, saying equity investments would be excluded from the restrictions.

 

The stock market rebounded sharply yesterday after the policy U-turn.

 

The spectacular ups and downs of the Thai stock market over the past two days have raised concerns about the possibility of another financial meltdown in Asia.

 

But economists dismissed such a scenario.

 

"The fundamentals of the Thai economy and its financial system are much healthier than they were in the early 1990s, which makes a replay of the 1997 crisis far less likely," said Zhuang Jian, an economist with Asian Development Bank's Resident Mission in China.

 

Other Asian economies and financial systems, Zhuang said, are also in a much better shape to ward off similar financial chaos than they were a decade ago.

 

Economists and experts said that the Thai stock market turmoil is unlikely to have substantial impact on China, but the country should learn some lessons from its neighbor.

 

"The turmoil in Thailand will not have an immediate or serious impact on China," said Zhao Xijun, a professor of Finance and Securities Research Institute at Renmin University of China.

 

"And even if it did, this would not be substantial," the professor added, saying that the scale of short-term foreign capital in Thailand is relatively small.

 

"Yesterday's market recovery is a sign that any worry about its contagious effect is somewhat exaggerated," Zhao said.

 

But experts said that China should proceed gradually with its capital account reform and conduct it in a controlled manner.

 

"It shows once again that emerging economies should move cautiously in their currency and capital account reforms," Zhao said.

 

He said that China should stick to its current policy of gradually moving to open its capital account reform in a controlled way.

 

He also said that the government should conduct wide consultations before making any major changes to foreign currency policy, noting that the Thai central bank failed to consult its stock exchange operators before announcing the currency controls.

 

As China's foreign exchange reserves, which exceed US$1 trillion, continue to grow, the central bank should introduce certain curbs on short-term capital inflows while it is moving to relax capital flows, said Ding Zhijie, vice-dean of the Institute of Finance at the University of International Business and Economics.

 

Short-term capital inflow curbs are a necessary move for China to achieve an international balance of payments, Ding said.

 

But Zhuang from the Asian Development Bank said that the government should move cautiously when taking measures to control short-term capital inflows, as "not all the short-term capital is speculative hot money."

 

As China's economy is growing healthily, Zhuang said, some short-term capital is actually coming to market with long-term intentions.

 

(China Daily December 21, 2006)