Erdoğan’s renewed interest in China

Turkey’s elections are now over and done with. President Recep Tayyip Erdoğan has cemented his position with enhanced powers. Nonetheless, the country’s economic woes stand unchanged.

As money flees emerging markets, Turkey’s need for external financing stands at a mouth-watering $230 billion over the next 12 months. The April-May turmoil for the lira, which forced the central bank to increase its total rate hikes this year by 425 basis points to 500 basis points, will turn growth negative in the third quarter following a 7.4 percent expansion in the first three months of the year and anticipated growth of about 6 percent for the first half.

The decline in consumer confidence was only halted ahead of Sunday’s presidential and parliamentary elections by government support schemes. Meanwhile, economic confidence indices keep hitting fresh lows. Interest rates on loans now stand at around 22-25 percent, banks’ lira loans to deposit ratios are a heady 145 percent, threatening banking sector liquidity. Consumer price inflation is set to reach 15 percent by the third quarter. All these factors constitute signs that things will not be getting any easier for the Turkish economy.  

While the new Justice and Development Party (AKP) administration keeps promising investors that it will initiate much-delayed economic reforms and will behave in a more fiscally prudent manner, looming March 2019 local elections give reason to suspect that may not occur.

The new AKP government, backed by the ultra-nationalist Nationalist Action Party (MHP) – its new coalition partner in parliament – needs to spend. But spending recklessly in the current global environment – emerging markets are selling off as the Federal Reserve raises interest rates – would trigger another bout of selling of the lira as the government loses further credibility. Therefore, the only other option is of course to outsource financing for economic growth.

While the hike in interest rates will help draw in some short-term portfolio investment, Turkey needs real investment in the form of foreign direct investment (FDI) to sustain growth levels.

The Erdoğan family’s close relations with Qatar have provided a useful tool in bringing in hard currency and increasing trade. Yet, Turkey needs more quality money that is unlikely to come from Western businesses, which are affected by the Fed rate hikes and are shying away from Turkey due to the state of emergency, erosion of the rule of law and the country’s worsening democratic record.

Thus, it is quite interesting to see how the AKP is attempting to coddle up to China in order to attract new funds.

The new Turkish ambassador to China, Abdulkadir Emin Onen, says that Turkey’s current trade volume with China totals $28 billion and Turkey aims to increase it to $50-100 billion. Consequently, Turkey will attempt to attract more Chinese investment and grant bilateral agreements to Chinese companies in various fields, including construction of railways and high-speed trains, and increasing the number of Chinese investors in large-scale projects, he says.

Turkish-Chinese trade

The easiest gateway to such cooperation is of course China's “Belt and Road Initiative” (BRI). BRI or the “Silk Road Economic Belt and the 21st-century Maritime Silk Road” is a development strategy proposed by the Chinese government which focuses on connectivity and cooperation between Europe, Eurasian countries, Africa and China. Under the Initiative, Chinese enterprises have invested roughly $50 billion and helped build 75 economic and trade cooperation zones in 24 countries.

Thus, not only in Turkey but in many other countries, the Chinese administration and companies are invested in “mega infrastructure projects” such as in railways, energy and port facilities. These are all investment areas that interest Erdoğan. In the case of Malaysia, the Chinese funding initiative means the country will carry out four major rail projects at an estimated cost of $40.3 billion. The investments will start in 2018. Erdoğan is thus wishing to attract similar amounts of Chinese money.

During the initial stages of the BRI’s implementation, FDI from China to Turkey has increased only modestly. Chinese FDI has been mainly focused in finance, logistics, energy, manufacturing and telecommunications.

China belt and road

In 2014, Chinese state-owned companies completed the second part of Turkey’s Ankara-Istanbul High-Speed Railway with the help of $720 million in loans from China Exim Bank. In 2015, China’s largest bank, the Industrial and Commercial Bank of China (ICBC), acquired Turkish GSD Holding’s entire 75.5 percent in Tekstilbank for $314 million. These investments were followed by a $300-million investment by The Bank of China (BOC), the seventh largest bank in the world and the third largest in China, in exchange for approval to operate deposit banking in Turkey. In 2016, China’s largest-listed telecommunications equipment and network solutions provider, ZTE bought a 48 percent share of Turkis telecommunications firm NETAS for $101.3 million. Chinese state-owned shipping and logistics companies have also invested $940 million in obtaining a 65-percent share of Kumport, Turkey’s third-largest container terminal. On June 28, Chinese internet giant Alibaba has decided to invest in Turkish e-commerce firm Trendyol.

In late 2017, the AKP administration invited a Chinese delegation to Turkey in an effort to voice its readiness to promote relations with China and deepen bilateral cooperation within the framework of the BRI. Turkish Foreign Minister Mevlüt Çavuşoğlu says Turkey, as an important country along the ancient Silk Road, stands ready to serve as a bridge linking Europe and China. When attending the Belt and Road Forum for International Cooperation in Beijing last year, Erdoğan called for the integration of the Middle Corridor project, a transport route from Turkey to Central Asia and China, into the BRI. 

It is reasonable to expect that China-Turkey cooperation will remain robust during the AKP’s new term. Yet, capital from the West, especially from European Union countries, still largely dwarfs Chinese investments in Turkey. Thus, while it seems logical for Turkey to take an increasing role in BRI, turning its focus to China, Russia and Qatar might not turn out to be the best solution.