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unconventional measures

Similar Monetary Measures at Both Ends of the Silk Road

The land route of the ancient Silk Road starts from eastern China and ends at the Mediterranean shores of the Asia Minor. Going as early as 2nd century BC, today it is largely a romantic story for us, with its’ economic and cultural significance generally overlooked. China’s effort to revive it in the 21st century is another story.

As the People’s Bank of China (PBOC) recently took some measures to tighten financial system liqudity, we have somehow remembered the Silk Road. This is because, at the both ends of the Silk Road, the PBOC and the Central Bank of Turkey (CBRT) are doing their best not to increase policy interest rates, while trying to maintain financial stability.

The motives of PBOC and CBRT, look both similar and different. On one hand, both central banks are trying to defend their currencies and prevent capital outflows, under pressure from slowing economies and FED tightening. China also aims to discourage asset bubbles, which seemed to be financed via interbank lending. Furthermore, both countries face the risk of high corporate leverage, domestic debt in China and external debt in Turkey. However, the PBOC and CBRT are reluctant to hike policy rates, except a 50bp hike in November from the CBRT, since they do not want to hurt their already gloomy economic outlooks. This reluctance is also being fed by very important political events in both countries; a critical Communist Part meeting in China and a constitutional referendum in Turkey.

On the other hand, inflationary pressures are building up in both countries. In fact, Turkey is clearly at a worse position, already suffering an inflation shock, mainly due to currency depreciation. Meanwhile, although the PPI is recording a fast increase in China, most of this is due to base effect and we don’t think inflation is an immediate threat, at least for the first half of the year.

Given these backgrounds, both CBRT and PBOC have taken some steps in the first two months of 2017, which appear to have similar and different effects until now.

One of the similar results can be seen at the upwards shift in market rates. In both countries, the interbank rates have rapidly increased following the central bank moves. Meanwhile, CNY and TRY recently show some signs of stability, with some additional help from increased risk appetite in global markets.


On the other hand, the yield curves in Turkey and China show different moves. The short end of the yield curve has clearly moved up in Turkey, while the long end went down. This indicates that the markets expect the CBRT to take back recent measures in the future and maybe cut rates, once the currency volatility and inflation has been controlled. However, in China, middle part of the yield curve has clearly increased and the overall curve has shifted up slightly, meaning anticipated policy tightnening ahead. This expectation is also being increasingly pronounced by economists.


To summarize, we think the monetary policies in Turkey and China will diverge in the coming months. Nevertheless, we wanted to point to the similarity for now. In fact, looking at current or past unorthodox monetary policies in emerging markets, we have started thinking whether using only one benchmark interest rate for these countries was the optimal monetary policy. Maybe we will visit the subject again in the future.