China may well offer financial help to Turkey, but it will not turn around the troubled lira

The Chinese government may well offer help to Turkey to build a bridge to another country hit by US trade sanctions

PUBLISHED : Monday, 13 August, 2018, 6:20pm
UPDATED : Monday, 13 August, 2018, 11:21pm

There is a decent chance that China will offer some financial assistance to Turkey, including buying some yuan-denominated bonds that it is expected to issue, as Ankara reaches out for “new friends” to defend its currency and economy amid an escalating conflict with the United States, analysts said.

However, Beijing will carefully weigh its options in assisting Turkey and will not offer a major bailout package due to the risk to broader support would further provoke the US.

Turkish President Recep Tayyip Erdogan said on Saturday that his country was now looking to form alternative economic alliances from “Iran, to Russia, to China and some European countries”, after the US “upset and annoyed” its Nato ally with sanctions that greatly exacerbated the lira’s existing troubles.

US President Donald Trump has demanded that Turkey release a US pastor being held on charges of aiding terrorists. Turkey has so far refused to comply, prompting Trump on Friday to double the tariffs on US imports of Turkish steel and aluminium, causing the lira to plunge.

The Turkish currency lost almost 20 per cent of its value against the US dollar last week and is down 40 per cent since the start of the year.

The threat to the lira, the stock market and the economy has drawn a sharp reaction from Erdogan , who has promised to look for new economic friends, including among traditional US adversaries.

China is at the top of the list.

Concerns about contagion from the lira’s plunge weighed on Asian stock markets on Monday, with 24 out of 26 Asian indexes reporting declines. The biggest loser was the Kosdaq index in Seoul, which fell as much as 3.7 per cent to a two-week low.

The Turkish newspaper Daily Sabah reported last week that the Bank of China Turkey Inc., the Turkish subsidiary of the state-owned Bank of China (BOC), would help issue Chinese-yuan denominated bonds for the government before the end of the year.

Neither BOC or Chinese central bank officials were available for comment on Monday.

BOC’s panda bond deal is not the first major economic deal between China and Turkish this year.

In late July, the state-owned Industrial and Commercial Bank of China (ICBC) agreed to provide a US$3.6-billion loan package for the Turkish energy and transport sector, Xinhua reported last week.

Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said the chance that the Chinese government would extend aid to Turkey was not small, but would be based on political rather than economic calculations given the risks that would be associated with such a move.

“As with any loan or bond issue, there is always the chance of default, and that risk would be particularly high when a country is at the eye of the storm,” he said.

But Beijing would likely factor in the longer-term benefit of building an alliance with a country that is also in conflict with the US, potentially giving Beijing more global political leverage in future.

But helping Turkey to circumvent the US sanctions would likely further provoke the US, which could respond with yet harsher measures against China, Yao added.

Sun Xin, a lecturer in Chinese and East Asian Business at the King’s College in London, agreed that the chances are good that China will help Turkey, so as to “unite some little brothers” in facing up to trade threats from the United States.

However, any China aid would be more of a political gesture rather than something that would bring fundamental support to the lira, he said.

The Turkish currency pulled back slightly Monday morning from its overnight record low of 7.24 to the dollar as the market awaits the announcement on Monday of the government plan to rescue the beleaguered currency. Earlier, the central bank pledged to provide liquidity and cut lira and foreign currency reserve requirements for Turkish banks.

However, the lira remains fragile given the market’s lack of faith in the Turkish government’s willingness to take the actions needed to its support its currency.

“In general, the size of Panda bonds, or any single bond issuance in any other currencies, is likely to be far too small to have any impact on either the Turkish lira or onshore yuan or China’s RMB internationalisation agenda,” said Becky Liu, head of China macro strategy at Standard Chartered.

Panda bonds were introduced in 2005 for foreign investors to raise money through yuan-denominated securities. Total issuance is expected to top 90 billion yuan (US$14 billion) in 2018, according to a January forecast by JPMorgan Chase, recovering from last year’s 40 per cent slump to 71 billion yuan and a far cry from the record 116 billion yuan record in 2016.

In March, The Philippines sold 1.46 billion yuan in three-year panda bonds, with a coupon rate of 5 per cent.