Turkey, China carry out first lira-yuan swap deal

Murat Cetinkaya
Murat Cetinkaya

The Central Banks of Turkey and China have concluded their first Turkish lira-yuan swap deal worth 450 million Turkish liras ($132.42 million), a Turkish Central Bank source told Anadolu Agency. The swap took place on Nov. 30, which is aimed at reducing reliance on the greenback. The move came after Turkish President Recep Tayyip Erdogan said Sunday his country was planning to trade with Iran, Russia and China in local rather than foreign currencies in order to strengthen the position of the Turkish lira and reduce dependency on the dollar. Turkish lira has lost more than 6 percent of its value against the dollar since November. Top Turkish officials, including the president have urged Turks to cash in their foreign exchange holdings and buy the lira to stem the Turkish currency's decline. According to economists, the swap deal will promote trade and help in maintaining financial stability in both countries.

The Central Bank of China’s website said it has so far carried out swaps with more than 30 central banks across the world to boost the use of the yuan as a global reserve currency and to stimulate bilateral trade. Enver Erkan, an analyst from Kapital FX, said Turkish officials are trying “to encourage the use of Turkish lira and domestic currencies in foreign trade and money substitution transactions.” Erkan recalled the remarks of Turkish Central Bank Governor Murat Cetinkaya on Tuesday when he said: "The Central Bank supports local currency usage with reasons of lower trade costs, efficient currency risk management and reduce high sensitivity to movements of reserve currencies.” Cetinkaya added: "We will continue to support the local currency as the medium of exchange in economic activities,” adding that the use of Turkish lira in foreign trade had risen to 6 percent of the total trade from 1 percent in early 2000s.

According to the analyst, the move could be considered as a major step towards “de-dollarization” in foreign transactions. He termed it as “a positive movement for the Turkish economy”, especially its funding credits and investments. “China is a major partner of Turkey; both countries have a $28 billion trade volume," Erkan noted. "CNY’s [Chinese Yuan Renminbi] transformation to reserve currency after being included in SDR [Special Drawing Right - an IMF created international reserve asset] basket, sets an opportunity for Turkey also with the usage of both CNY and TRY [Turkish lira]. “Same steps could be taken with Russia and Iran as well through [such] money swap deals," Erkan added.

ICBC Turkey -- the first Chinese bank that started operations in Turkey by acquiring a majority of shares in a local bank on May 22, 2015 -- became the first bank to use the money swap agreement that was inked to boost trade between the two countries. Currently, China is one of the largest trade partners of Turkey with a bilateral trade volume of $28 billion as of last year.

Iranian parliament Chairman Ali Larijani said on Tuesday his country also welcomes the call of President Recep Tayyip Erdogan to use local currencies in bilateral trade. “Iran always prefers trade in local currencies,” Larijani said.

Official figures show a rising trend in the use of Turkish lira in foreign trade even before the last push was made by government officials.

In the first 10 months of the year, approximately $5 billion worth of overall exports, which stood at $117 billion, was made through Turkish liras, indicating a 20.4 percent increase from the same period last year.

Also, imports worth $11.5 billion in the first 10 months of the year were made using the lira, according to the Turkish Statistical Institute.

“President Erdogan is right [about the local currency issue], and his speech has a well-prepared background. Like his ‘world is bigger than five’ statement, it not only echoed domestically, but also around the world,” Hilmi Guler, member of the board at ICBC Turkey, said. “I strongly approve the use of local currencies in foreign trade. But, as usual, lobbyists and status quo supporters object to this issue,” Guler said.

About the currency swap between the Central Banks of Turkey and China, Gurel said: “Actually, trade itself is an exchange activity, and there shouldn’t be extra variables in transactions. It is important to reduce the risks of changing currencies in trade.” He said China was feeling confident about Turkey in China, which could be gauged from the fact that Chinese businesspeople continued to increase their investments in the country, and the ICBC, largest bank in China, had also begun operate here.

“There are a lot of opportunities to seize with China, especially in technology, telecommunication, and medicine sectors. In the coming future, Turkey and China may establish an international university jointly. Turkey will reach the lands wherein the sun rises through culture, universities, finance and tech companies,” Guler added.

Bulent Aksu, chief financial officer at Turkcell, said: “It is essential to establish a national economy, [which] should be resistant to financial attacks. “In this sense, we deem the use of national currency [in foreign trader] as significant, and believe the state actions will also serve as guide to the private sector on this issue,” Aksu said. He said Turkcell had started to turn to the Turkish lira in its corporate transactions which were previously made through foreign exchange, including in investment payments, purchases of goods and services, rental contracts, and equipment from external suppliers. “We have stopped buying foreign exchange from the market in accordance with these measures. Moreover, we are waiting for the necessary legal arrangement to be able to pay the final installment of the 4.5G license fee in Turkish lira,” he said. About dollarization being one of Turkish economy’s structural problems, he said: “The fragility of the Turkish lira would be ended as a result of decreasing demand for foreign exchange and a broad acceptance of these measurements by the private sector.”