According to Dagong Global, one of China’s credit rating agencies, the United States is only marginally more trustworthy than Turkey when it comes to honouring its debts.
In January, Dagong downgraded its local and foreign currency credit ratings for US sovereign debt from A- to BBB+. The outlook was negative because the agency expects Donald Trump’s tax cuts to erode the federal government’s ability to repay debts. Two months later Dagong reaffirmed its double-B rating for Turkey, praising Recep Tayyip Erdogan’s “continuity of policies” in promoting growth.
Reports from rating agencies can be well off the mark, as investors learned to their detriment during the financial crisis a decade ago. As for Dagong’s assessment of Turkey, the nation’s lira has fallen by over 40% in value so far this year, while the greenback is going from strength to strength, particularly in relation to the Chinese currency, which started the year at around 6.5 yuan to the dollar but is now pushing close to the 7 yuan threshold.
Turkey’s currency crisis has been worsened by the row with the US over the detention of an American pastor but the situation has analysts in China watching with interest because Washington and Ankara are also escalating a tariff war.
A related fear, notes the Economic Observer, is that the lira’s slum could triggers a currency crisis in other markets. After all, the newspaper points out, the Asian financial crisis began two decades ago with the collapse of the Thai baht and spread quickly around the region.
Another question is whether China might be willing to oblige if Turkey comes calling for an emergency loan. Erdogan has been preparing the ground for bailouts, saying that Turkey is looking to form alternative alliances from “Iran, to Russia, to China and some European countries”, and Qatar was the first to offer help, pledging $15 billion of direct investment into Turkish markets and agreeing a currency swap to boost liquidity.
Chinese newspapers highlighted that state-owned banking giant ICBC lent $3.6 billion to Turkey in July for the energy and transportation sector and there are also reports in the Turkish media that Bank of China could issue yuan-denominated bonds for the government in Ankara this year. But for the time being Beijing has been coy about committing to a bigger bailout. China’s willingness to extend credit in the past has impressed many emerging nations, writes Bloomberg columnist Ren Shuli, but some of the loans and currency swaps with countries such as Venezuela, Pakistan and Sri Lanka haven’t always gone to plan.
A slowing domestic economy may prevent Beijing from being so generous this time too.
Turkey’s position as a key point for some of the trade flows in China’s Belt and Road Initiative might make it more in Beijing’s interests to expand its influence there. But a complicating factor is the situation in Xinjiang, a Chinese region that has strained relations with Turkey in the past. As we reported in WiC290, Chinese tourists were attacked in Istanbul in 2015 by Turkish nationalists sympathetic to Xinjiang’s Turkic-speaking Uighurs, who claim that their culture and religion is being supressed by Beijing. The Chinese government has in turn accused Ankara of harbouring supporters of Uighur independence, a group that it classifies as terrorists.
Meanwhile the news for Dagong – which got Turkey so wrong in its ratings – was even worse this week when it was forced to suspend its services for a year for providing improper information to government regulators and charging excessive fees for its services. Dagong issued an apology, vowing to pursue its goal of “growing as a Chinese brand with international recognition”. According to Sina Finance, it also complained to the central bank that the punishment is unfair and warned that suspension of its ratings could create “systemic risk”.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.