China’s Economic Influence in Turkey: Manifestations and Calculations

EPC | 01 Sep 2021

Mutual political recognition in 1971 triggered trade deals between China and Turkey. However, due to the geographical distance and the relatively closed Turkish economy, the ties did not develop until 1991. Since then, Turkey has pursued a policy of foreign trade openness not accounting for the trade balance deficit. Since 2001, bilateral trade exchange has been on an upswing. After China joined the World Trade Organization in 2002, Beijing increased its investment in developing countries such as Turkey. Moreover, when China established the Infrastructure Investment Bank (AIIB) in Beijing in 2013, Chinese investments funded by the bank began to flow directly to Turkey.

As part of its efforts to diversify economic relations, Turkey has sought to strengthen its trade cooperation with China, significantly improving the trade exchange over the last decade. However, despite the significant commercial cooperation, political relations did not improve with the same intensity. There has not been a strategic rapprochement with Beijing like Turkey sought with Russia, for example, to purchase strategic weapons and broader military cooperation. Although Turkish President Recep Tayyip Erdogan officially requested to join the Shanghai Cooperation Organization in 2016, his request was rejected by Russia and China. Beijing realizes that as long as Turkey remains a member of NATO, their political cooperation will remain limited in Beijing’s cautious foreign policy.

Two-Way Trade

Since 2013, China has become Turkey’s third-largest exporter after Germany and Russia. Except for Turkey’s vital need to import natural gas from Russia and technology and industrial products from Germany benefiting from a free trade agreement, Turkey’s imports from China seem huge. A free trade agreement does not bind the two countries, and Turkey does not import strategic commodities from China, such as energy. Also, goods from China require a month to reach Turkey by sea.

From 2013 to 2020, Chinese exports to Turkey amounted to US$ 163.3 billion, while its exports to China during the same period were worth only US$ 23.3 billion. Consequently, the trade balance deficit favors China by about US$ 17 billion annually. Although China is the world’s largest exporter, Turkey ranks 16th in the list of countries China exports. Therefore, it can be said that Turkey is not an indispensable market for China, even though the balance of trade is heavily in China’s favor.

Most of Turkey’s imports from China are mobile phones, electronic products, industrial machines, and textiles. On the other hand, Turkey’s main exports to China are raw materials such as marble, chrome, and copper. In 2017, the Baku-Tbilisi-Istanbul railway with China connected a direct route to Istanbul. The railway has reduced the time for transporting goods between the two countries from a month by sea to only 14 days by train. This commercial route started operations in 2020.

Turkey does not get a significant number of tourists from China, registering only about 340,000 in 2018. It is pertinent to note that there is no government directive for Chinese tourists to visit Turkey. Interestingly, Turkey struck a deal with Beijing in 2001 to allow an old Ukrainian aircraft carrier purchased by China to pass through the Turkish straits in exchange for China’s pledge to send 2 million Chinese tourists to Turkey annually. However, the annual number of Chinese tourists to Turkey has not exceeded a quarter of this number since then. In 2019, about 154 million Chinese tourists toured the world, but less than 400,000 visited Turkey. Those numbers indicate that China does not encourage its citizens to travel to Turkey despite this deal.

In the construction sector, Chinese companies are a robust competitor to their Turkish counterparts worldwide. Among the 250 largest contracting giants globally, China owns 74 companies, making it the first, compared to 44 Turkish companies, the second in the world after China. There is also intense competition between the two countries to win construction projects in North Africa, the Middle East, Russia, and Central Asia. China recently increased its share of construction projects in those areas at the expense of Turkish companies. Therefore, both countries generally do not allow - except in the narrowest limits - the companies of the other to operate in their local markets. Hence, there are no sizeable Chinese construction companies in Turkey yet.

Financial Investments

To abandon the dollar and the euro used in trade, Ankara and Beijing have encouraged bilateral trade in the local currency. The two countries signed a SWAP financial exchange agreement in 2012, which is renewed every three years. The value of exchanges arising from this agreement reached the equivalent of US$ 6 billion in 2021. Turkey uses this agreement to bridge the deficit in foreign reserves at its central bank.

In 2015, the Industrial and Commercial Bank of China (ICBC), China’s largest bank, bought Turkey’s Tekstil Bankasi, financing textile, and garment projects. However, the Chinese bank did not have a great appetite to expand its operations in Turkey. It was content with raising the transactions of the Turkish bank that it bought in six years from US$ 1.5 billion to only US$ 3 billion. In 2017, another Chinese bank, the Bank of China, opened a branch in Turkey to finance Chinese investments in Turkey. However, this bank also did not invest more than US$ 300 million in Turkey.

Despite American opposition, Turkey joined the Asian Infrastructure Investment Bank (AIIB) in 2016, following in Britain and Germany’s footsteps.  China holds a 30 percent stake in the AIIB and has 26.06 percent of the voting rights in the lender. Turkey participated with a sum of US$ 522 million and held just 2 percent of the voting rights. Ankara’s goal was to obtain loans and investments from this bank to implement major projects in Turkey. Indeed, Turkey has secured financing for three energy projects on its soil with a total value of US$ 1.4 billion from this bank. The most important projects have been a large natural gas storage facility in Anatolia and gas pipelines across Anatolia to deliver it to several provinces. The bank also provided Turkey with a soft loan of US$ 300 million in 2020 to address the repercussions of the coronavirus pandemic.

China’s Direct Investment in Turkey

As part of China’s Belt and Road Initiative (BRI), since 2015, Beijing has launched direct investments in several Turkish projects that serve this strategy. The most important of these direct investments was the Chinese company Cosco Pasific picking up a 65 percent stake in Turkey’s third-largest port, Kumport Port in Istanbul, for an amount of US$ 950 million. The same company has bought a small stake in the Greek port of Pire, where it plans to connect both ports with the BRI project. In 2019, a Chinese consortium bought the Italian company Astaldi’s 51-percent stake in the international expressway project in Istanbul, along with the third suspension bridge linking the Asian and European sides of Istanbul, for US$ 669 million. China is also expected to benefit from this international highway linking Asia with Europe through the BRI project. The Bank of China also opened a branch in Istanbul to finance bilateral trade between Beijing and Ankara, with a capital of US$ 300 million.

Among the remarkable direct Chinese investments in Turkey is the Chinese e-commerce giant Alibaba’s purchase of a 75-percent stake in the Turkish e-commerce company Trendyol for US$ 728 million. Alibaba aims to raise its share to 86 percent in the company. This e-commerce platform is one of Turkey’s most important and fastest-growing companies.

Also, among China’s direct investments of strategic importance was purchasing a 48-percent stake in the Turkish telecom device company Netas, which produces and develops civil and military communications software. Netas is also developing Turkey’s 4.5G network and is competing for its 5G internet development projects despite a government decision to nationalize this field and limit it to Turkish companies considering its sensitivity. However, Turkish companies are still turning to Chinese companies to develop their capabilities in this field. Turkey’s leading telecom company Turkcel has partnered with China’s Huawei to achieve this goal. Turkey does not have the financial or technological capabilities to build the 5G network project entirely and is obliged to cooperate with foreign companies. Here, China is pressing to win these deals despite significant American pressure on Ankara to discourage cooperation with China in this field.

In recent years, due to the depreciation of the Turkish lira, the minimum wage decline in Turkey, and because Turkey continuously raised taxes on electronic devices, especially mobile phones, two Chinese companies moved to invest and established two factories in Turkey. They manufactured smartphones, taking advantage of low wages. The first is Xiaomi, which has set up a factory in Istanbul employing 2,000 workers to manufacture smartphones. The factory plans to start production in 2021. The second is Oppo, which has set up another smaller factory also in Istanbul that will employ 1,000 workers. The production in this last factory is expected to start at the end of 2021. Thus, the Chinese companies will benefit from the low wages in Turkey, and the free trade agreements concluded by Turkey with Europe to market and sell products. The two factories assemble mobile phones and do not transfer technology to Turkey. The minimum wage in Shanghai, China, is about US$ 400, while in Turkey, it is currently only US$ 330.

The cooperation between Turkey and China in the military industry does not exist for political reasons. The only time Turkey tried to break out of the US diktat in this regard was in 2013 when it struck a deal with China to manufacture US$ 3.4 billion worth of missile defenses. This deal was important to Turkey because it guaranteed the transfer of military technology. However, due to American pressure and the decision to place the Chinese missile manufacturers on the US-sanctioned companies list, the Turkish government was forced to cancel the deal in 2015. Once again, the Turkish decision proved to Beijing that it is not possible to influence Turkish policies through commercial or military cooperation even though Turkey subsequently bought the Russian S-400 missile system as an alternative.

Conclusions

China is actively seeking to expand its investments in Turkey for purely commercial and economic reasons. Beijing seeks to take advantage of Turkey’s financial and economic crisis and its strategic location that serves the Chinese Belt and Road Initiative project.

Beijing realizes that it cannot influence the Turkish political decision because of Turkey’s membership in NATO and its strong relations with the US, and the Uyghur minority crisis in which Turkey previously tried to intervene with US support. However, despite the political differences between the two countries, Beijing does not see anything wrong with increasing its investments in Turkey as long as they push the BRI project forward. On the other hand, Turkey finds in China and its investments an economic outlet to obtain foreign exchange and job-generating investments.

Although China has recently sought to improve its image in Turkey by funding “commercial propaganda” through Turkish newspapers and the media, the Turkish opposition’s raising of the Uyghur issue from time to time does not help Beijing much in achieving its goal. Thus, it cannot be said that Beijing has a soft power in Turkey that can influence the Turkish political decision-making process through financial and economic investments. After a summit of the leaders of the seven industrialized countries agreed on a project to counter China’s flagship BRI, Turkey will be in a problematic situation if pressure increases on it to attract it to the Western project.

At the same time, Ankara uses Chinese investments to pressure the United States and the European Union to provide more financial and economic support as an alternative to Chinese investments. However, neither the European Union nor the United States seems ready to compete with these Chinese investments in Turkey, despite an investment-attractive economic climate driven by low minimum wages. Political differences continue to impede the flow of Western investments into Turkey due to the decline in freedom and human rights and the politicization of the judiciary, a factor that China does not care much about.

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