The People's Bank of China and the Central Bank of Turkey have renewed the bilateral local currency swap agreement. The scale of the agreement is 35 billion yuan (approximately 4.88 billion US dollars), equivalent to approximately 189 billion Turkish liras. The new agreement has a validity period of three years and can be extended. This is part of the ongoing efforts by both countries to increase the use of local currencies in trade and reduce reliance on the US dollar.

In order to expand this trend, both parties have also signed a memorandum of understanding to establish a renminbi clearing mechanism within Turkey, allowing commercial banks to directly settle trade payments in renminbi, paving the way for promoting bilateral trade and investment using renminbi and lira at the expense of traditional hard currencies.

According to this mechanism, Turkish importers will be able to pay for imported goods from China locally in renminbi without going through the US dollar, while Chinese exporters will also be able to receive payment in renminbi in the Turkish market. This move indicates a broader transformation beyond trade facilitation.

Currency Partnership

The renewal of this agreement is part of Turkey's current policy framework aimed at reducing dependence on the US dollar in foreign trade and strengthening the position of the lira in currency settlements with international partners. The Central Bank of Turkey has set the goal of expanding the use of lira and renminbi in trade with China and providing additional tools to support financial stability in times of international market turbulence and pressure on the domestic currency.

By contrast, this move aligns with China's strategy to promote the internationalization of the renminbi and expand its use in cross-border trade settlement, especially in cooperation with developing economies including Turkey, where Turkey holds a key position in the "Belt and Road" initiative.

This policy continues the path that Turkey began several years ago. In 2016, President Recep Tayyip Erdogan called for the use of local currencies in trade with China, Russia, and Iran to alleviate pressure on the lira and strengthen its position in the global monetary system.

The first currency swap agreement between the Central Bank of Turkey and the People's Bank of China dates back to February 2012, when both sides agreed to open a credit line of 10 billion yuan (approximately 1.6 billion US dollars at the time) equivalent to 3 billion Turkish liras, aiming to promote bilateral trade and enhance foreign exchange liquidity in the Turkish market.

In 2015, the agreement was extended for another three years, with the swap limit increased to 12 billion yuan. Subsequently, the loan was renewed again in May 2019, significantly increasing to 35 billion yuan, which coincided with Turkey's growing demand for foreign liquidity during periods of exchange rate volatility.

The agreement officially took effect in June 2020, when the Central Bank of Turkey allowed imports from China to be paid directly through the local banking system in renminbi for the first time. In June 2021, the Central Bank of Turkey announced that the full value of the quota (then 35 billion yuan, or approximately 46 billion liras) had been registered in its reserves after reaching high-level political and economic understandings with Beijing.

Swap Network

Over the past few years, Ankara has implemented a diversified monetary swap policy with some regional and international partners to strengthen its foreign exchange reserves and expand the protection of the Turkish lira.

In August 2018, Turkey signed a 5 billion US dollar currency swap agreement with Qatar, which was increased to 15 billion US dollars (approximately 54.6 billion Qatari riyals or 1 trillion Turkish liras) in May 2020, considered crucial for enhancing central bank reserves during the peak of the pandemic crisis.

In August 2021, Ankara reached an agreement worth 20 trillion Korean won (approximately 17.5 billion liras at the time) with South Korea, which was extended for another three years until August 2024, amounting to 23 trillion Korean won, equivalent to approximately 1.7 billion US dollars at current exchange rates.

As for the UAE, a swap agreement worth 18 billion dirhams and 64 billion Turkish liras (then valued at 4.9 billion US dollars) was signed in January 2022, coinciding with the recovery of bilateral relations and the period when the lira depreciated by more than 40%. Ankara has also held similar talks with other countries such as Japan and the UK but has not yet reached final agreements.

Direct Benefits and Conditional Impacts

Economic analyst Mohammed Abu Al-Iyan believes that renewing the currency swap agreement with China will bring direct economic benefits to Ankara, but its structural impacts remain limited unless Turkey undertakes deeper economic reforms.

Abu Al-Iyan explained in an interview with Al Jazeera that the first benefit is the enhancement of foreign exchange reserves, as the liquidity of renminbi provides the Central Bank of Turkey with additional room to cope with market pressures and fluctuations in the domestic currency. He also pointed out that the agreement helps promote direct payment of Chinese goods in renminbi, reducing the need for conversion through the US dollar and minimizing losses caused by exchange rate differences.

However, he emphasized that the convenience of renminbi payments does not resolve the severe imbalance in the trade balance, as Turkey's annual exports to China are approximately 4.3 billion US dollars, while China's imports exceed 39 billion US dollars. This makes Turkey the largest beneficiary of paying for imports in renminbi, while China's use of the Turkish lira remains restricted due to this long-term imbalance.

Regarding liquidity, Abu Al-Iyan explained that these arrangements provide the central bank with additional liquidity in lira, but they are essentially short-term debt that must be repaid with accrued interest. He emphasized that this point is extremely important for assessing the nature of these agreements.

He also warned that prolonged use of these tools would incur cumulative costs, noting that withdrawals from these quotas require interest linked to the Shanghai Interbank Offered Rate (SHIBOR), plus additional margins. Therefore, the longer the use of liquidity, the greater the financial burden becomes.

New Positioning

On the other hand, economic researcher Neel Karahan believes that the update of this mechanism represents a symbolic step toward diversifying Turkey's currency status, although it is still in its early stages and does not signify a rapid transformation of Turkey's financial system structure, which remains almost entirely dependent on the US dollar and euro.

Karahan explained in an interview with Al Jazeera that Turkey's agreement to establish a renminbi clearing center opens up broader space for expanding trade settlement options, not only with China but also with other potential partners who may prefer to conduct transactions in renminbi, thereby strengthening Ankara's connection with Beijing's efforts to build a global financial system.

However, she emphasized that the success of this move depends on various factors, including the private sector's acceptance of its use, the stability of the exchange rate between the lira and renminbi, and China's continuous support for expanding the system.

She believes that this trial could gradually promote the integration of non-traditional currencies like renminbi into Turkey's economic cycle in the future, but currently, it remains just a tactical step in Turkey's policy of diversifying financial partnerships, nothing more.

Source: aljazeera

Original article: https://www.toutiao.com/article/7518952022654157366/

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