To say that Zimbabwe has not had much luck with its monetary system experiments, would be an understatement.
After its disastrous adventures with hyperinflation denominated in its own currency...
... Zimbabwe decided to entirely abandon its reserve currency and shift to the dollar.
As we reported over the summer, the Zimbabwe Central bank completely "demonetized" the old Zimbabwe Dollar which would be removed as legal tender after the currency’s use was abandoned in 2009 following a surge in inflation to 500 billion percent. To do this, the bank would exchange up to 175 quadrillion Zimbabwe dollars for $5 US dollars, the country’s central bank said.
Which, as we admitted then, surprised us for three reasons.
First, as noted in 2011, in a stunning example of irony, Zimbabwe cult central banker Gideon Gono made it clear he wishes to avoid another episode of transplant currency hyperinflation courtesy of his counterpart in the Marriner Eccles building and "warned that Zimbabwe’s nascent economic recovery is at the mercy of the United States dollar, which is facing new pressures from the Euro-zone debt crisis." Yes, Zimbabwe was bashing the US Dollar.
Gono said Zimbabwe should in be looking to the Chinese yuan as its main currency, while urgently seeking to restore its own currency which was abandoned in 2009 after a dramatic loss of its value. Amusingly, he said that "with the continuous firming of the Chinese yuan, the US dollar is fast ceasing to be the world's reserve currency and the Euro-Zone debt crisis has made things even worse." And the terminal slap in the face of all that is American: "As a country, we still have the opportunity to avoid being caught napping by adopting the Chinese yuan as part of consolidating the country's look East policy."
Second, as further reported early in 2015, China decided to reciprocate Zimbabwe's diplomatic overtures, by taking a special interest in the south African nation bordering the gold and diamond rich Republic of South Africa. It did so by announcing it planned to set up a modern high-tech military base in Zimbabwe's diamond-rich Marange fields.
The news of the agreement to set up the first Chinese military airbase in Africa comes amid increasing bilateral cooperation between Zimbabwe and China – notably in mining, agriculture and preferential trade. China is the only country exempted from the indigenisation laws which force all foreign investors to cede 51% of their shareholding to carefully selected indigenous Zimbabweans.
China could be positioning itself for future “gunboat diplomacy” where its military presence would give it bargaining power against superpowers like the US. It would also be safeguarding its significant economic interests in Zimbabwe and the rest of Africa.
The third, and most important reason, is that according to leaked confidential Central Intelligence Organisation documents suggested that China had played a central role in retaining President Robert Mugabe in the country's most recent elections, indicating that high level military officers had worked closely with the local army in poll strategies while Beijing bankrolled the ruling party, Zanu (PF).
The new Chinese Ambassador to Zimbabwe, Lin Lin, recently said trade between the two countries last year exceeded the $1 billion mark. Yet Zimbabwe is only 26th on the list of China’s 58 biggest African trading partners.
The Asian country has supplied Zimbabwe with military hardware, including MIG jet fighters, tanks, armoured vehicles and rifles, since Independence. In other words, while nobody was looking, China just took over one more nation without spilling a drop of blood.
And then, on Monday, all of our confusion was laid to rest when Zimbabwe announced that this small, economically devastated country would officially make the Chinese Yuan its legal tender as it seeks to increase trade with Beijing. In exchange for becoming not only a military but also financial colony of China, $40 million of its debts to Beijing would be canceled.
China was delighted it cost it only a $40 million debt write off to acquire its first official African colony.
China says Zimbabwe’s adoption of yuan as legal tender will facilitate country’s economic & social development, boost China-Zimbabwe ties— CCTVNEWS (@cctvnews) December 23, 2015
"They (China) said they are cancelling our debts that are maturing this year and we are in the process of finalising the debt instruments and calculating the debts," Minister Patrick Chinamasa said in a statement, cited by AP.
Chinamasa also announced that Zimbabwe will officially make the Chinese yuan legal tender as it seeks to increase trade with Beijing. It then started using a slew of foreign currencies, including the US dollar and the South African rand.
The yuan was later added to the basket of the foreign currencies, but its use had not been approved yet for public transactions in the market dominated by the greenback.
Use of the yuan "will be a function of trade between China and Zimbabwe and acceptability with customers in Zimbabwe," the minister said.
Zimbabwe's central bank chief John Mangudya was in negotiations with the People's Bank of China "to see whether we can enhance its usage here," said Chinamasa.
As the Star adds, "the Chinese are determined to make their currency as prestigious as possible and this is a cheap way for them to be able to claim that their currency is becoming more internationally accepted — it’s now legal tender in another country."
Adoption by a struggling economy has been a privilege previously reserved for the U.S. dollar, which is officially used by almost a dozen other countries. While the yuan circulates unofficially in some countries that neighbour China, Cohen said Zimbabwe’s official adoption is a major step toward making a claim to be on par with the dollar.
To be sure, there are problems which come with adopting foreign currencies over which one has no control, as Greece will eagerly admit:
But taking on a foreign currency is much easier than weaning yourself off it, Cohen said, pointing to Greece, which could benefit from being able to devalue its own currency to make their economy more competitive.
“Adopting a foreign currency can put a lid on hyperinflation,” he said. “But it’s very difficult to reverse the process.”
To be sure, Zimbabwe's handover of monetary and military sovereignty to China is not surprising: after all the world's most populous nation is the country's biggest trading partner following Zimbabwe's isolation by its former Western trading partners over Harare's human rights record. In reaction veteran President Robert Mugabe adopted a "look East policy", forging new alliances with eastern Asian countries and buttressing existing ones.
In early December, Chinese President Xi Jinping stopped over in Zimbabwe in a rare trip by a world leader to the country, and presided over the signing of various agreements, mainly to upgrade and rebuild Zimbabwe's infrastructure such as power stations.
And while Zimbabwe may be the first official Chinese colony in Africa, it will hardly be its last. Recall that as we reported yesterday, the bulk of Africa's formerly prosperous if corrupt oil exporters have found themselves in a state of petrodollar collapse, and as the central banks of countries from Nigeria, to Angola, to Ethiopia, to Mozambqique scramble to defend their currencies and avoid hyperinflation, they have stopped the circulation of US dollars in their economies, leading to an accelerated economic collapse.
Which is great news for Beijing: once all these oil-rich economies unravel, who do you think will be just waiting there, ready to pick up the pieces and happy to provide these countries with generous servings of its own, recently SDR-ed currency?