Zimbabwe adopts yuan as legal tender

Zimbabwe adopts yuan as legal tender
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Zimbabwe’s adoption of the yuan as legal tender demonstrates its close ties with China, and Beijing’s efforts to globalize its currency.

Long a pariah state under the rule of aging despot Robert Mugabe, Zimbabwe has witnessed an economic uptick in recent years. This reversal of fortunes has been brought about, in part by (until recently) rising commodity prices, as well as a diversification of foreign investment options. Indeed, by 2013 commentators noted that “on current trends Zimbabwe’s economy is about five years away from a full gravity-defying recovery.”

Back from the brink

Zimbabwe’s ruin has been orchestrated for decades by Mugabe’s policies; a state of affairs that was only hastened by international sanctions condemning the country’s regime. Faced with widespread famine, economic collapse, and the expulsion of most wealthy, white land owners, Zimbabwe long teetered on the precipice.

Perhaps the most potent symbol of the country’s dysfunction was its historic levels of hyperinflation, which peaked at 79.6 sextillion per cent. Zimbabwe abandoned its own currency in 2009, instead making the South African rand and U.S dollar legal tender in the country. Since then it has also added the British pound. These moves have curtailed inflation, the perennial bugbear of Zimbabwe’s economy.

Given these existing solutions, Zimbabwe’s recent adoption of the yuan as legal tender appears unnecessary. Yet this move provides interesting insights into Harare’s relationship with China, as Beijing is one of the main drivers behind Zimbabwe’s recovery.

Chinese investment prompts turnaround

As Western nations broke off trading relations with Zimbabwe, many Western leaders had high hopes that international pressure would cause the Mugabe regime to implode. Yet Zimbabwe is impoverished due to mismanagement, not a lack of goods for sale. Consequently, as traditional trading partners left, emerging powers, notably China, stepped in to fill the gap.

China’s laissez-faire attitude towards its trading partners and insatiable hunger for resources was the savior for Zimbabwe’s economy. Recognizing this, Mugabe announced his “look east” policy, in which he courted Chinese investment, and built a Confucius Institute at Zimbabwe University. Moreover, Mugabe’s anti-colonial tirades, especially against the UK, found sympathetic ears in Beijing, itself recalling its own “Century of Humiliation” at the hands of colonial powers.

As China slowly began to enter African markets, it sought out countries overlooked or shunned by Western investors: Zimbabwe fit the bill perfectly. Beijing sought to court Zimbabwe with the deep pockets of state run companies, and shadowy investors such as Sam Pa (a man with seven known names and ties to the Chinese intelligence service.)

1-sam-paSam Pa (pictured) is a perfect example of China’s ambitions in the region, having acted as Beijing’s fixer and deal maker in dozens of African countries. Pa – who was arrested in an anti-corruption sweep in 2014 – reportedly gave $100 million to Mugabe’s Central Intelligence Organization (the main tool of repression in the country) in exchange for access to diamond contracts.

Pa’s fate is unsurprising, for while individuals such as himself were instrumental in China gaining market access in the early 2000s, his purpose has been served. China’s clout is now undeniable, and while African despots enjoy dealing via ingratiating middle men like Pa, China no longer needs court nations away from Western investors: the whole world now seeks to entice Chinese investment.

Zimbabwe’s buddies in Beijing

China is now Zimbabwe’s largest trading partner, purchasing 27.8% of the country’s exports. Moreover, bilateral trade has grown from $500 million in 2010 to $1.24 billion in 2014, with Beijing having provided Zimbabwe with $1 billion in low-interest loans since 2010.

December saw both the announcement that the yuan will become legal tender in 2016, but also a visit from Xi Jinping to Harare. Xi’s visit saw the announcement of an additional $1 billion in loans to upgrade the largest thermal energy plant in the country. Xi also promised to cancel $40 million of Zimbabwe’s debt.

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This visit and its attendant goodies for Zimbabwe can be seen as rewards for aiding China’s efforts to internationalize the use of the yuan. Given the amount of business China does with Harare, the use of yuan will make imports from Zimbabwe cheaper, especially if Harare is currently being paid in dollars. Moreover, yuan usage could boost Chinese tourism to Zimbabwe, as Chinese tourists could pay for services with yuan instead of Western currencies.

Most importantly, Zimbabwe’s yuan announcement came just a week after China finally managed to get the yuan included in the IMF’s Special Drawing Rights currency basket. China is seeking to usurp the place which the U.S dollar currently holds in the Zimbabwean economy. The dollar already acts an ‘economic lingua franca’ in Africa so to speak, with the greenback unofficially accepted in many countries. From Beijing’s perspective promoting the yuan makes sense and third party use of its currency is a sign of international economic prominence. Various states in Latin America and Polynesia already officially use the dollar, so what Washington can do, Beijing seeks to match.

China’s expansive economic connections in Africa make the widespread introduction of the yuan on the continent a welcome potential development: the myriad of weak currencies in the region only aids this aim. Zimbabwe’s hyperinflation nightmare saw the country adopt the currencies of hostile nations: the yuan is a much friendlier, and less embarrassing alternative.

About Author

Jeremy Luedi

Jeremy is the Web Editor and frequent contributor at Global Risk Insights (GRI), and has worked for NGOs and political parties in Canada. Jeremy's writing has been featured in Business Insider, Huffington Post, Nasdaq.com, The Diplomat, and Yahoo Finance. His work also has been quoted by Time Magazine, Politico, Transparency International, Greenpeace, and Nikkei Business, among others.