According to media reports, Thailand's stock market collapsed on December 19 as a result of its failure to withstand the pressure of the new Thai Government's effort to keep down the exchange rate of the baht.

The benchmark SET index plummeted by 19.5 per cent. Although it later managed to climb 5 per cent after the Thai Government called off its decision to limit the free flow of foreign exchange, a total of US$23 billion was lost. Worse, it set a chain reaction in motion, causing ups and downs in the stock markets of neighbouring countries.

The quake seems to have been triggered by a decision made by the new Thai Government: Foreign capital that is invested in the Thai market should not be withdrawn within one year of the investment; foreign investors should make a deposit in the Thai central bank of an interest-free special reserve equivalent to 30 per cent of the investment to be made; and a fine will be imposed accounting for 10 per cent of the invested capital if the investment is withdrawn before the one-year time limit expires.

The decision is aimed at controlling the free flow of foreign funds in the Thai monetary market. But why were the control measures introduced? First, they are designed to prevent Thailand from sliding into the financial straits of 1997. At the time, foreign funds flooded into Thailand from the international monetary market, raising property prices in the Thai market. But in the face of huge risks stemming from extremely high property prices, these funds began to exit Thailand, triggering the 1997 Asian financial crisis.

Second, the new Thai Government has to deliver something to revive the Thai economy before it can step out from the shadow of the military coup. The baht has been appreciating in large margins since the beginning of the year, due largely to the fact that foreign speculative capital flows freely and is not subject to control.

The amount of speculative capital streaming into Thailand daily in December stood at US$900 million, three times that in November. It is likely, in this scenario, that the Thai economy could retrace the footsteps of the 1997 crisis if the Thai Government does not take harsh measures to deal with the problem.

Though the government action has caused great shock to the monetary market for the time being, the present quake could translate into long-term stability for the Thai financial market, in the opinion of this author. And what is currently unfolding in Thailand might be of reference value for China.

With the Chinese economy developing on a fast track and its currency getting increasingly involved in the international monetary market, some people think the renminbi should be appreciated and the reform on the convertibility of the renminbi under the capital account should be quickened.

However, an unreasonably quick pace of renminbi convertibility reform could turn the Chinese financial market into a paradise for foreign speculative funds to plunder Chinese wealth, let alone facilitate the development of the domestic financial market, taking into consideration the reality that China's monetary system is still defective and its operation mechanisms yet to become highly market-oriented.

Now, foreign funds are casting covetous eyes on the Chinese financial market, even though renminbi convertibility is yet to be enhanced. They are ready to enter the Chinese market by hook or by crook, inflating the real estate and stock market bubbles. And they are also ready to take to their heels once they have milked fat profits from these markets.

In addition, China's property prices have been rising fast over the last year a sign that China is following the footsteps of the Thai monetary market? Prices on the domestic stock market have been soaring this year, driven largely by those trumpeting the need to re-evaluate domestic stock values.

The holders of this opinion believe that all the paper money in the world including the renminbi, which is actually appreciating, the euro and the US dollar is depreciating in the context that the international gold price keeps going up, along with virtually all the futures of the world's mining sectors and the prices of bulky goods. The depreciation of paper money is the result of central banks, via the issue of currencies, watering down the value of property owned by citizens. This automatically pushes up commodity prices.

Property prices the world over are also being driven up. And the stock and bond markets have also turned bullish. China is no exception. Not only have the prices of all mining sector products gone up dramatically over a short period, but real estate prices are also rising fast. In this climate, the "re-evaluation" of the domestic stock market actually means a round of stock price hikes.

Driven by this school of thought, among other factors, the price of domestic real estate rockets and record amounts of shares change hands. The re-evaluation of the value of the domestic stock market is more to do with the wishes of investors than real needs. It also reflects the wish of institutional investors to lure more small and medium investors into the stock market.

Government regulatory and supervisory agencies should be on high alert over the fast price rise in property, closely watch speculative activities and irregularities and pay attention to the influx of foreign capital into China's market. And institutional measures should be taken to rid the domestic financial market of its defects.

The government should keep a close watch on changes in the Hong Kong stock market to prevent an assault from international speculative funds as was seen in the 1990s.

(China Daily 12/23/2006 page4)