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Turkish lira sinks to record low after central bank holds fire

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Turkey’s central bank has dented hopes for a return to economic orthodoxy, pushing the lira to a new record low, after ignoring calls from many investors to raise its main interest rate.

The Turkish lira fell as much as 2.1 per cent following the decision to keep the benchmark one-week repo rate on hold and instead tweak the cost of borrowing through an obscure emergency facility.

The currency, which is down more than 20 per cent against the dollar this year, teetered on the brink of the symbolic threshold of 8 to the buck after the decision. It recently traded at TL7.979.

Phoenix Kalen, an emerging markets strategist at Société Générale, said a rise to the main rate would have sent “a credible signal to the market that they were willing to hike explicitly the benchmark repo rate, that they were addressing the deterioration in inflation expectations and continuing with the gradual shift back towards more conventional monetary policy”, she said. “But clearly we did not see that.”

“It sends quite a negative signal to the markets,” she added. “Now it seems like they are going back to a strategy of relying on stealth tightening. It is a shift backwards towards that more secretive, more opaque strategy. The market doesn’t like that lack of transparency.”

The central bank has long been under heavy pressure from President Recep Tayyip Erdogan, a staunch opponent of high interest rates who last year sacked the former governor, Murat Cetinkaya, following a disagreement over monetary policy.

Line chart of  showing Lira tumbles to fresh low after central bank keeps rate on hold

However, the bank surprised markets last month by increasing its main one-week repo rate for the first time in two years.

That move boosted the mood among analysts, most of whom expected policymakers to double down on efforts to steady the embattled lira and lure back much-needed foreign capital with a second rate rise on Thursday.

Instead, the bank announced it would keep that main rate on hold while instead lifting another rate, the late liquidity window, from 13.25 per cent to 14.75 per cent.

The bank has in recent months used that channel, which in normal times is usually reserved as an emergency facility, as a way of increasing the cost of funding to the Turkish financial system without announcing a large increase to its headline rate. The overall cost of funding has already risen to its highest level since December last year.

Still, the news was greeted negatively by investors who had hoped that last month’s decision would mark a turning point. Timothy Ash, an analyst at BlueBay Asset Management, said the Turkish central bank “never seems to learn”. He added: “It seems like they will be stress-tested again after this failure to hike the base rate.”



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Hong Kong-Taiwan spat threatens cross-Strait business

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Official representation between Hong Kong and Taiwan is set to end this year as mounting political tensions threaten one of the region’s most important trade and investment relationships.

The number of staff in Taiwan’s representative office in Hong Kong has dwindled over the past two years as the territory has stopped issuing visas, with the documents of those who remain due to expire by the end of November.

Hong Kong also abruptly suspended operations of its representative office in Taipei two weeks ago, ending its official presence there. The stand-off has grown so severe that Taipei has begun making contingency plans for a situation without on-the-ground representation in Hong Kong, two senior Taiwanese government officials said.

The breakdown in relations follows rising military tensions between Taiwan and China and a crackdown by Beijing on pro-democracy groups in Hong Kong that has led some activists in the territory to seek refuge in Taipei.

China claims Taiwan as part of its territory and has threatened to annex it if the island fails to submit to its control indefinitely.

Analysts said that cutting official channels would undermine Hong Kong’s traditional role as a conduit for business and financial exchanges between Taiwan and China. Despite the dispute with Beijing over sovereignty, Taiwanese companies are among the largest foreign investors, employers and exporters in mainland China.

Taiwan air force personnel during the visit by President Tsai Ing-Wen
Military tensions between China and Taiwan have escalated, but investment and trade across the Taiwan Strait remains important to both countries © Ritchie B Tongo/EPA-EFE/Shutterstock

A significant part of trade across the Taiwan Strait trade goes through Hong Kong, and many Taiwanese investors in China also use Hong Kong for financial, taxation and legal purposes. Last year, Taiwan was Hong Kong’s second-largest trading partner, while Hong Kong was Taiwan’s fifth-largest, with HK$504bn (US$65bn) in total bilateral trade. Taiwanese companies invested US$912m in Hong Kong in 2020, while Hong Kong-registered companies invested US$555m in Taiwan.

“Hong Kong has been a springboard for Taiwanese companies into mainland China and it has also been a springboard for Chinese [companies] into Taiwan,” said Liu Meng-chun, a research section director at the Chung-Hua Institution for Economic Research, a Taiwanese government-backed think-tank.

Tensions between Hong Kong and Taipei have escalated over the past two years after the territory started demanding Taiwanese diplomats sign documents declaring their country part of China as a precondition for being issued a visa.

After Taipei refused, the number of staff at its office in Hong Kong began to dwindle, from 20 to eight today, according to the Mainland Affairs Council, Taiwan’s cabinet level China policy body.

Hong Kong, meanwhile, said it was temporarily closing its Taipei office because “Taiwan’s series of actions in recent years has severely damaged Hong Kong-Taiwan relations”.

A Hong Kong government official suggested the suspension came on instructions from Beijing.

“I think Beijing is of the opinion that [Taiwan’s representative office] affects national security,” said Sung Yun-wing, an economics professor at the Chinese University of Hong Kong, who is also a member of a semi-official think-tank, the Chinese Association of Hong Kong and Macao Studies, in Beijing.

“There have been reports that Taiwan has been encouraging the protest movement in Hong Kong, which has turned violent, so the protest movement is not only against the Hong Kong government but also Beijing,” said Sung. He added China was also concerned Taiwan was “sheltering” Hong Kong protesters.

While Taipei has been careful to avoid being seen as making it too easy for Hong Kong dissidents to flee to Taiwan, civil society groups in the country have supported the protest movement with advice, money and logistics. “This is something we cannot interfere with as they have done nothing illegal,” said a senior Taiwanese China policy official.

Historically, Hong Kong’s most important economic role in the Taiwan-China trade has been as a sea and air trans-shipment hub for Taiwanese companies to supply their factories in southern China with components.

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While analysts suggested that much of this commerce could continue even if official ties between Taiwan and Hong Kong were severed, they foresaw a sizeable impact on financial services, tourism and education.

“Hong Kong plays a very important role for Taiwanese private wealth management,” said Patrick Chen, head of Taiwan research at CLSA, the brokerage.

He said many Taiwanese individuals had accounts in Hong Kong, where the local units of Taiwan’s banks offered them offshore investment products not accessible under the island’s stricter regulations.

Liu of the Chung-Hua Institution for Economic Research said many Taiwanese enterprises kept profits from their China operations with their Hong Kong affiliates for tax purposes.

“These things would become a lot more cumbersome without official representation because you would have to start sending documents back and forth for notarisation,” Liu said.



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Nato leaders fret China’s Atlantic ambitions

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China’s growing military and economic presence in the Atlantic region is expected to trigger a rare warning from Nato leaders about the potential security threat when they meet on Monday, diplomats said. 

From joint Chinese drills with Russia to western worries that China wants to set up military bases in Africa, the Nato focus reflects China’s primacy among western foreign policy concerns, in particular those of US president Joe Biden.

“This is not about ‘Nato going to China’,” said Claudia Major, a defence analyst at the German Institute for International and Security Affairs. “It’s about ‘China is coming to Europe and we have to do something about it’.”

In 2015, joint military drills with Russia brought the Chinese navy into the Mediterranean and the heart of Europe for the first time. Since then, China has built up the largest naval fleet in the world and invested in critical European infrastructure, including ports and telecoms networks.

“China [through its navy] has come through the Indian Ocean, into the Gulf, up to the Red Sea and they’ve been in the Mediterranean,” according to one British military official, who said China had not yet deployed submarines in the north Atlantic but could do so in future.

“You build nuclear submarines for range and stealth. And China does like to test the boundaries.”

The planned joint statement by the transatlantic security alliance, which diplomats said was still under discussion and subject to change, would be only the second time that Nato leaders have addressed the subject of China head-on. The first was in December 2019, at the insistence of the administration of Donald Trump.

But Biden is understood to be pushing for tougher language than the bland “opportunities and challenges” terminology used that time.

Nonetheless, how to deal with the issue represents a dilemma for the 30-member group, which was originally set up in 1949 to deal with cold war-era threats.

Internally, Nato countries are divided over how to treat China: member Hungary, for one, has good political relations with Beijing.

In addition, there is reluctance to confront Beijing in its own Pacific region — although the UK and France have followed the US in deploying ships to carry out freedom of navigation exercises in the South China Sea.

Chinese and Russian marines take part in joint exercises in China’s Guangdong province
Chinese and Russian marines take part in joint exercises in China’s Guangdong province © Li Jin/Getty

China’s joint military operations with Russia are viewed as a particularly unwelcome development by some Nato members. As well as their annual military exercises, Beijing and Moscow have recently added joint missile defence drills and training for internal security forces.

“Their [the Chinese/Russian] relationship is transactional and pragmatic rather than ideological,” the UK military official said. “But working together in any form provides confidence. And confidence is something we should be wary of.”

As the Center for a New American Security, a bipartisan US think-tank, warned in a January report: “Where Russian and Chinese interests align, Moscow and Beijing could eventually co-ordinate their combined capabilities to challenge US foreign policy.”

Another Nato anxiety is Africa, which China could use to expand its military presence in the Atlantic as part of its long-term goal to become a truly global armed force.

Gen Stephen Townsend, head of US Africa Command, told the US Senate in April that his “number-one global power competition concern” was what he described as Chinese efforts to establish a militarily useful naval facility on Africa’s west coast. “I am talking about a port where they can rearm with munitions and repair naval vessels,” he said.

Experts on the Chinese military said there was no evidence that Beijing was trying to establish such a west African base, yet. However, China has a base in Djibouti and has already used international anti-piracy missions in the Gulf of Aden to train thousands of military personnel and to build military relations with countries outside its usual neighbourhood.

Each time a naval contingent finishes deployment, for example, it typically takes a detour on the way home. Some have visited the Mediterranean and the east and west coasts of Africa.

Another trend vexing Nato allies is the growing involvement of Chinese companies in critical infrastructure in Europe, such as through telecommunications company Huawei.

Chinese state shipping company Cosco also owns a controlling stake in Piraeus, Greece’s largest port, and is reportedly in talks to invest in a Hamburg port terminal.

Such economic ties complicate Nato’s efforts to create a unified approach on China — as do the political relationships between Beijing and friendly European leaders.

That creates the potential for clashes, with the tougher stance of Washington and Jens Stoltenberg, Nato’s secretary-general, who last month warned that China was “coming to us” in areas including cyber space, Africa and the Arctic.

“There is a risk that having this discussion within Nato surfaces very uncomfortable differences between allies on how much China is actually perceived as a threat,” said Sarah Raine, an expert in geopolitics and strategy at the International Institute for Strategic Studies.

“The fact is that there are countries which are seen by hawks as making very pro-China arguments within Nato, at least with regards to being robust but not confrontational.”

Additional reporting by Katrina Manson in Washington



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Sponsors pull out of Copa America in Brazil over Covid risk

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A trio of corporate sponsors — Mastercard, Ambev and Diageo — have pulled their brands from the Copa America football competition in Brazil, which is due to kick off on Sunday in spite of the country’s raging Covid-19 crisis.

Latin America’s largest nation offered to host the regional tournament at the end of last month after previous co-hosts Argentina and Colombia cancelled. Buenos Aires cited an increasing number of coronavirus cases, while Bogotá blamed domestic protests.

Brazil’s decision to step in, which had the backing of rightwing president Jair Bolsonaro, drew censure from many medical figures and opposition politicians, who argued it risked further spreading the virus as the pandemic continues unabated in the country.

Mastercard said after careful analysis it had decided to remove its branding from this year’s Copa America, though it will remain a sponsor of the competition, which was already postponed in 2020.

British alcoholic drinks group Diageo, which owns Smirnoff, Guinness and Johnnie Walker, said it would stop all brand activities “given the current health situation in Brazil and in respect of the timing of the Covid-19 pandemic”.

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“The sponsorship terms were agreed upon when the event was scheduled to be held in Colombia and Argentina,” the company added. “Diageo reiterates its commitment to society, observing safety protocols and institutional actions that contribute to the mitigation of the pandemic.”

Brazilian beer maker Ambev, which is part of the world’s largest brewer AB InBev, said “its brands will not be present at the Copa America”. 

The votes of no confidence come as Brazil faces a potential third wave of Covid-19 infections with the cooler season setting in.

At more than 480,000 lives lost, the country has the second-highest death toll from the respiratory disease after the US. A shortage of jabs has stymied vaccination campaigns.

“We are still in a very serious situation,” said Marcelo Ramos, a researcher in public health at the Fiocruz biomedical institute. “When it was announced that Brazil would host the Copa America, the message was that we are in a calm situation, which does not correspond to reality.” 

However, the country’s health minister this week insisted holding the football competition would not generate any additional risk of contamination, since no fans would be attending matches. 

Bolsonaro has earned international opprobrium for his handling of the pandemic, which has included disparaging the use of masks and talking down the importance of vaccines.

But the former army captain received a boost when the Brazilian department store chain Havan, whose co-founder Luciano Hang is a vociferous supporter of the president, announced it would sponsor the tournament.

“I’m sure it will be a competition that will delight the entire Brazilian population”, he said.

This week Brazil’s supreme court rejected attempts to bar the country from hosting the Copa America. 

The Brazilian Football Confederation and the South American Football Confederation did not respond to requests for comment.



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