The Central Bank has begun to buy Chinese bonds

Although it had later been revealed to be fake, the news story that stood out the most last week was on how the United States had supposedly found Chinese bonds more appealing than other financial assets.

“The market for U.S. government bonds is becoming less attractive relative to other assets, and trade tensions with the U.S. may provide a reason to slow or stop buying American debt,” said the story published in Bloomberg on Jan. 10, citing officials who had asked to remain anonymous. The story also said the Chinese State Administration of Foreign Exchange (SAFE) had declined to comment.

These allegations stirred the markets. American bond interests rose because China holds nearly $1.2 trillion of its $3.1 trillion reserves in American bonds.

Even though the story had later been revealed to be fake, it is apparent this had been a maneuver ahead of a possible “trade war.” However, the real story comes from Ankara. It turns out, the Central Bank in Ankara had made the maneuver in the first place.

Starting in the middle of last year, the Central Bank began to change its reserve policy’s route and had started to increase its ever-stable gold reserves. By the end of 2017, the bank had increased its gold property to 202 tons from 116 tons. This way, the Central Bank had exchanged $3.5 billion worth of its cash for gold. For currency reserves, the 4 percent change had been a small change but considering the medium term, this had been a big step.

Following this step came another; this time, I learned the Central Bank had begun buying Chinese bonds in Yuan. While opting for gold instead of currency on one hand, it seemed the Central Bank was now shifting its policy towards Yuan instead of using fundamental currencies such as euros or dollars.

A significant amount of the Central Bank’s currency is kept in U.S. state bonds. According to the U.S. Treasury’s data, the Turkish Central Bank held $61 billion worth of U.S. bonds by late October 2017. This amount equals two-thirds of the total currency in the same period.

It is very clear Turkey’s international position reflects its economic ties and “bank account.” However, its meaning today is only symbolic. At most, it could be said its efforts are “concerned with decreasing dollar reserves” because the Chinese Yuan is not nearly convertible. It does not have any reserve value. As China frees its currency exchange arrangement and makes its currency more convertible and sustainable, the Yuan will attain the nature of reserve value.

In the future, as trade and agreements become more common with the Chinese Yuan, companies, banks and central banks will feel the need to have Yuan assets or reserves.

The gold oddity in balance of payments

The data on the balance of payments was released Jan. 12. Our current deficit came up to $43.7 billion by the end of November 2017. In the same period in 2016, the numbers were $33.7 billion. Our current deficit has risen $10 billion in one year.

I had written about this before; there is clearly something strange here, and that is how we have imported $9.5 billion net worth of gold in 2017. So, this means our current deficit has not changed in 2017 other than the gold imports worth $9.5 billion.

Other than what the Central Bank has imported, there is still a veil on Turkey’s gold imports worth $9.5 billion. It cannot be explained how gold imports have reached $16 billion, when under normal circumstances, these imports do not go over $5-6 billion, based on the domestic market and sale to tourists. Especially while in the same period in 2016, Turkey exported $2.7 billion worth of gold.

With this much in imports, let us also remember that these numbers reached $15 billion with Reza Zarrab’s gold operation in 2013, while we had previously seen it around $5-6 billion.