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2006-03-06 09:05:00
Embassy Bangkok
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DE RUEHBK #1372/01 0650905
P 060905Z MAR 06
						UNCLAS SECTION 01 OF 05 BANGKOK 001372 




E.O. 12958: N/A






E.O. 12958: N/A


1. (SBU) Summary: Well known as a destination of foreign
investment, China is becoming a foreign investor in its own
right and is seeking out investment opportunities in
Thailand. Encouraged by a friendly business atmosphere and a
stable environment for investment, Chinese investors see
Thailand as a manufacturing and export base to expand markets
in the rest of ASEAN. Net investment remains relatively low,
a reflection of the generally conservative nature of most
Chinese investment here, but trend lines for future
investment point up, with some Thai officials predicting that
China will one day become one of the top investors in
Thailand. The Thai government sees an opportunity in China
as a new investment suitor and has made a high-level
commitment to encourage their northern neighbors to invest in
numerous projects. Chinese investors are still finding their
way through unfamiliar territory, but certain cost advantages
and improving analytical and management methods are
brightening their investment future. End Summary.

2. (SBU) Thirty years after China renewed diplomatic
relations with Thailand, Chinese investors flush with capital
and newly confident of their business acumen have begun to
seek out investment opportunities in Thailand. Although
traditionally a direct competitor with Southeast Asia for
foreign investment, China has found niches for its own
investment in the region in pursuit of an outward investment
strategy to participate in international capital markets and
stake its own claims overseas.

3. (SBU) Although investment numbers from China are still
dwarfed by overall foreign investment statistics, the growth
of Chinese investment has been rapid. In 2003, Thailand's
Board of Investment (BoI) set a goal of expanding Chinese
investment by 30 percent for the year; instead investment
rocketed up 300 percent in 2004. In 2005, BoI approved 12
new projects submitted by Chinese investors for a value of
2.2 million baht (USD 57 million), about half that of 2004,
but a number of large projects applied for toward the end of
2005 have yet to be approved. Chinese companies have made
direct investments in 154
different investment projects in
Thailand, with a net value of USD 773 million. The largest
investments are in garments and light industry, but
substantial investments exist in such diverse areas as
chemicals and plastics, mining, machinery, electronics and
agribusiness. Most projects are small to medium enterprises,
but many of the larger and better known companies from China
such as Huawei and TCL, which have the capital and technical
knowledge to support larger projects, are making their
presence known. RTG goals for future Chinese investment are
ambitious, with plans for a 35 percent growth in investment
from China in 2006 and talk of China one day soon becoming a
top investor in Thailand.

Gateway to ASEAN

4. (SBU) China's investment goals in its overseas bids
have ranged from resource-seeking in Africa and Latin America
to technology-seeking in the U.S. For Thailand, analysts see
China utilizing a market-seeking investment strategy, using
the country as a production base to expand its market share
in Thailand, and as a springboard for exports to the rest of
Southeast Asia. Thailand has promoted this strategy as well
and is marketing itself as a bridge connecting China to other
ASEAN members, promoting its strategic position in ASEAN, its
abundant labor, solid base of production technology and large
consumer market. Further, Thailand's network of bilateral
free trade agreements, some completed and others still in the
works (including with the U.S), provide an avenue for
tariff-free trade for Chinese manufacturers in Thailand, and
also a means to sidestep quotas on Chinese manufacturing,
most notably in apparel exports.

5. (SBU) Thailand's Board of Investment claims that China
has successfully planted more investment in Thailand than in
any of its ASEAN neighbors. Mr. Vikrom Kromdit of the
Thailand-China Business Council says Chinese investors see
much to like in Thailand, including a long history of good
relations (in contrast to their occasionally touchy relations
with other SE Asian countries), and a stable political and
economic situation. Close cultural relations bring an added
advantage. According to Vikrom, Chinese investors feel an
affinity with Thai culture and are comfortable dealing with
Thai businessmen, many of whom are of Chinese descent. For
their part, Thais are positive about their expanding
relations with China. In a recent poll, 83 percent of Thais

BANGKOK 00001372 002 OF 005

said they had a favorable opinion of China (73 percent had
the same opinion of the U.S.), and 97 percent said the
bilateral relationship with China was good.

6. (SBU) This positive view persists despite the widely
held view here that China tends to trade unfairly and has
received a disproportionate share of the benefits of the 2003
China-Thai "early harvest" covering bilateral free trade for
about 35 fruits and vegetables. During a visit to Thailand's
northern Chiang Rai and Chiang Mai provinces, billed by the
RTG as the country's "gateway to China", businessmen
invariably complained to econoff about the uneven playing
field they face when trading with China. Problems range from
a Chinese monopoly on river traffic on the Mekong ("only the
Chinese know when they will open the dams allowing boats to
navigate during the dry season"); to the extremely low price
for Chinese garlic and vegetables (below cost for Thai
farmers, "is it due to hidden subsidies?"); to the Chinese
provincial authorities applying non-tariff barriers to goods
imported directly by Thais rather than through Chinese
middlemen, e.g. applying sanitary and phyto-sanitary
regulations more stringently to goods exported by Thais than
to those exported by Chinese.

7. (SBU) Thai trade with China is also inhibited by a lack
of understanding of Chinese rules and regulations. Some
bankers in the North told us that letters of credit are
available only "government-to-government", another said Thai
insurers won't cover shipments to China. This confusion among
smaller Thai exporters has given the opportunity for Chinese
traders to control the exports of certain Thai products
(especially fruits and vegetables) into the Chinese interior.
The large Thai companies in the food processing industry tend
to ship directly from Bangkok to Chinese ports and indicate
few problems with their transactions. The Chinese
agricultural goods traders have invested in some small-scale
food processing businesses but generally have confined their
operations to purchase and transport of final product.

8. (SBU) Mr. Pisanu Rienmahasarn, Deputy PermSec of the
Ministry of Commerce, told Econoff he saw China's increased
investment in Thailand as an extension of its "Go West"
policy, opening up economic opportunities in China's western
frontier and taking advantage of their southern provinces'
relative proximity to Thailand. The provincial government of
China's Yunnan province, situated directly north of Thailand
separated by parts of Burma and Laos, have engaged with RTG
officials in northern Thailand to improve the flow of trade,
investment and tourism between the two regions. China, Laos
and Thailand have linked up with the Asian Development Bank
to construct a road through Laos that would link Kunming in
Yunnan province to Chiang Rai in northern Thailand. Although
there is a current road link through Burma, the route is
considered insufficient for the heavy volume of goods flowing
from China, and concerns remain about political stability in
Burma. The RTG has provided loans to Laos for road
construction and a bridge across the Mekong River, and
expects the project to be completed by the end of 2007. The
RTG is also upgrading ports along the Mekong River to handle
increased traffic flow; Chinese shipping companies already
dominate river traffic. A rail link from Kunming to
Thailand's Laem Chabang port near Bangkok is also under
consideration by regional governments.

9. (SBU) In anticipation of greater trade between Yunnan
and northern Thailand, Yunnanese authorities and local
officials in Thailand's northern Chiang Rai province have
been planning a Northern Region Industrial Estate to
accommodate anticipated investment from China. Although
dozens of Chinese companies stated intentions of investing,
the project has stalled out lately in the face of political
problems with the original proposed site in Chiang Saen
district. The industrial estate promises to take advantage
of the coming road, rail and port improvements between
southern China and northern Thailand, but may not be the
center of bilateral trade as it was once anticipated. Dr.
Sompop Manarungsan, Director of China Studies at
Chulalongkorn University, speculated that the industrial
estate may never get off the ground. As the implementation
date of the China-ASEAN FTA comes nearer and tariffs fall
across the region, there will be fewer reasons to focus on
northern Thailand as a gateway to the rest of ASEAN. One
Chiang Mai businessman, who ships Thai products by sea, noted
that southwest China "is poor and can't afford the higher
cost/higher quality goods that we produce in Thailand. There
is no reason to trade with Yunnan. Our market is China's

BANGKOK 00001372 003 OF 005

Looking for opportunities

10. (SBU) China's investments in Thailand to date have
followed little overall strategy other than a search for
profitable investment opportunities. Analysts see no central
coordination of China's investments other than provision of
loans by the Chinese government to overseas investors.
China's investments appear to focus on trade creation and
taking advantage of China's comparative strengths. In
contrast to investments from developed countries, which
typically focus on comparative advantages in technology,
management and marketing, China's investments in Thailand lie
in their advantages in flexibility and cost, in particular
lower salaries for technical staff. China analysts suspect
that in addition to already low costs, some Chinese companies
have bid on projects at below cost, accepting the short-term
losses in a bid to gain experience and better position
themselves for future projects. Chinese companies most
frequently team up with Thai partners in new investments.
Companies have to date not focused on mergers or acquisitions
or taking over established Thai brands as a means to enter
the market as has been seen in other countries.

11. (SBU) China's cost advantage in construction has raised
expectations for a burgeoning presence of Chinese
construction firms. Dr. Sompop of Chulalongkorn University
speculated that the oversupply of construction companies in
China is fueling interest in overseas construction projects
to make use of idle capacity. The RTG is actively
encouraging Chinese investment in construction of its new
megaprojects infrastructure development program, and
predicted that twenty percent of the contracts for the USD 24
billion program will go to Chinese firms. However, a recent
meeting for international investors on megaprojects was
sparsely attended by Chinese.

12. (SBU) China's new traveling class (the fourth largest
source of visitors to Thailand in 2004) is opening up new
investment opportunities overseas as well. The Chinese New
Year in January saw a large influx of Chinese tourists,
bringing Thailand closer to its goal of expanding annual
tourism figures from one million Chinese visitors (actual
2005 total was 800,000) to three million by the end of 2010.
The Tourism Authority of Thailand (TAT) budgeted 10 million
baht (USD 250,000) for Chinese New Year festivals in Bangkok
and other provincial tourist destinations to attract mainland
tourists. After a post-tsunami downturn in visitors from the
mainland in 2005, the number of Chinese tourists is gradually
improving. Airlines have expanded direct flights between
China and Thailand and the RTG is encouraging even more.
Incoming tourists are sparking an interest in Chinese
investment in hotels and resorts in Thailand and travel
agencies to guide them in. In September 2005 the TAT signed
a tourism agreement with three Chinese tour operators and a
public relations company, Publicitas China, to raise the
profile of Thailand in China and market Thailand to Chinese

13. (SBU) Thailand is not considered a rich source of
energy for China, but Chinese oil companies have nevertheless
expressed interest in working with the Petroleum Authority of
Thailand (PTT) on energy projects. PTT and China's oil major
Sinopec announced in June 2005 that they were considering a
joint project to build an oil pipeline across the Isthmus of
Kra to connect the Andaman Sea to the Gulf of Thailand and
bypass the increasingly congested Strait of Malacca, cutting
as much as a week of transportation time for crude oil
shipments to China from the Middle East and improving
security of shipping routes. However, the oil pipeline
project has been under consideration by the RTG for years and
previous feasibility studies cast some doubt on the financial
viability of the project (reftel). To date the pipeline
remains in the planning phase and is not expected to go
forward. Another Chinese oil producer, CNOOC, has agreed to
work with PTT to explore new oil fields in Thailand and
abroad, and to seek new potential in existing Thai oil fields.

Thais lend a hand

14. (SBU) Eager to tap into China's enormous foreign
exchange reserves, Thailand is actively encouraging mainland
investment. The two countries formed the Thailand-China
Joint Committee on Trade, Investment and Economic Cooperation
in 2004 to promote economic ties. At the most recent meeting
in September 2005, the two countries signed 11 agreements
over issues from logistics cooperation down to trade

BANGKOK 00001372 004 OF 005

protocols for crocodile meat. The Thai side is represented
by Deputy Prime Minister Somkid, designated "Mr. China", with
responsibility for promoting bilateral investment with China.
Somkid has made monthly trips to China and has been hosting
a continual procession of visiting Chinese dignitaries,
speaking at investment conferences, and overseeing the
signing of trade and investment deals. As part of the Joint
Committee, the two sides have established a working group
with Yunnan province which holds regular meetings regarding
trade, investment, culture, and tourism between the two
regions. Somkid is pushing Chinese participation in
construction, food processing, logistics, electronics and

15. (SBU) In 2003, Thailand's Board of Investment (BoI),
the entry point for most formal investment in Thailand,
established a China desk headed by veteran China hand Charas
Chitkittichamras. Although Thailand provides no special
privileges to Chinese investors, Charas said the BoI saw the
need to assist less experienced Chinese investors to learn
the ropes of investing in Thailand. The RTG also established
the Thailand-China Business Council, headed by Mr. Thanakorn
Seriburi, a vice-chairman of Thai conglomerate CP Group (CP
Group has considerable interests in China, especially in the
food processing and retail sectors). The Business Council
has been active in arranging investment conferences and
partnering Chinese investors with local firms.

16. (SBU) Mr. Piroon Laismit, Director of the China Desk at
the Ministry of Foreign Affairs, said that Thailand's close
relations with Taiwan have not slowed the formation of closer
economic relations with China. Although Thailand closely
follows the One China policy, their relations with Taiwan go
back for decades and are still valued. Taiwan is among the
top three investors in Thailand and Piroon estimated 10,000
Taiwanese businessmen were resident here. Piroon believed
China was pragmatic enough to keep political and economic
issues separate and said he had felt no pressure from China
on economic matters with Taiwan. Nevertheless, he conceded
that any future problems between China and Taiwan would be
likely to affect their own bilateral relationships with the
two nations.

Much ado about nothing?

17. (SBU) Despite the impressive growth in Chinese
investment and the attention given to it by the RTG, analysts
stressed to Econoff that investment from China was still a
fraction of that from more established foreign investors from
North America, Europe and Japan, and still had little impact
on the Thai economy. When asked where China stood on the
list of foreign investors in Thailand, BoI's Charas replied,
"They're not even on the list." The latest BoI statistics
show Chinese investment as still only one percent of net
foreign investment. Charas noted also that Thais have been
investing in China for the last twenty years and Thai
investment in China was over ten times the value of Chinese
investment in Thailand. As yet no Chinese companies have
listed on the Thai stock exchange.

18. (SBU) Analysts pointed out the numerous difficulties
faced by Chinese investors. Most Chinese are relatively
inexperienced in overseas investment compared to their
Western or Japanese counterparts and are unfamiliar with the
investment environment. Despite the prevalence of
Thai-Chinese businessmen in Thailand, mainland Chinese
investors tended to speak a different dialect than their
counterparts, and did not have advanced English language
skills to communicate with their partners and customers.
When confronted with problems, Mr. Charas said that Chinese
firms had a tendency to send their own experts from China to
solve problems rather than relying on local staff, usually
with less than stellar results. One representative from the
largest Chinese investor in Thailand, Worldbest, spoke of the
difficulties the company had after setting up business in

2001. Despite its size (accounting for at least a quarter of
all Chinese investment in Thailand) the firm faced
difficulties in breaking into local supply networks. Without
established relationships with suppliers, Worldbest found
itself low on the priority list for supplies and met
production delays.

19. (SBU) Though some companies have found rough going in
starting new investments, future Chinese investments may be
more successful, if for no other reason than that the RTG
wants it that way. BoI sifts through investment applications
from Chinese investors and is approving only those it

BANGKOK 00001372 005 OF 005

believes will be successful. With Chinese investment still
in a nascent stage, BoI is careful to manage perceptions
about investment in Thailand and is wary of news of failed
investments filtering back to China and discouraging future
investors. Chinese investors are also quickly learning the
investment game and are being more systematic in their
investment approach. According to BoI's Charas, initial
Chinese investments tended to focus on areas where an
investor had a personal relationship with a partner in
Thailand, without necessarily examining all the investment
factors and the profitability potential of the venture.
These days young Chinese MBAs schooled in modern management
methods are leading the new wave.

20. (SBU) Despite RTG assistance, Chinese investors have
hardly been a juggernaut. A tobacco joint venture in Chiang
Mai has suffered from financial disputes and there have been
numerous anecdotes of plans for Chinese-invested projects in
the Northeast being cancelled after environmental concerns
were raised. High hopes for a recent bid by Chinese
conglomerate CITIC Group to build a rail link to Bangkok's
new Suvarnabhumi Airport were dashed after a European
consortium outbid the Chinese. However, in January,
Thailand's biggest construction contractor said it would
partner with CITIC to bid on twenty major projects in

21. (SBU) Comment: Despite going through some expected
growing pains, Chinese investment is beginning to come into
its own and trends indicate rapidly increasing Chinese
participation in the Thai market. Bilateral trade is
ballooning, and investment is likely to follow directly in
its path. Bilateral trade reached USD 12 billion in 2004
with preliminary estimates of a 75 percent increase in 2005.
Deputy PM Somkid said recently he was confident that trade
would reach USD 50 billion by 2010 (bilateral trade with the
U.S. totaled USD 26 billion in 2005). There are few fears
that China, Inc. will steamroll the competition anytime soon,
but the Thais have sat up and taken notice that a new player
has taken a seat at the investment table even as they are
aware that Chinese are typically careful investors and have a
difficult market to crack. End comment.