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Good Idea? Zimbabwe adopts Chinese yuan as one of its legal currencies

Last year, Zimbabwe added China’s official renminbi to its basket of currencies, which includes the US dollar, British sterling, and the South African rand, considered legal tender.

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The Chinese yuan may soon be used as legal tender in Zimbabwe. Zimbabwe’s finance minister has said China and the southern African country are negotiating plans to increase local usage of the yuan. The two countries are also discussing the cancellation of $40 million worth of debt that Zimbabwe owes to China, its largest investor.

Last year, Zimbabwe added China’s official renminbi to its basket of currencies, which includes the US dollar, British sterling, and the South African rand, considered legal tender. The yuan has not yet been approved for public transactions. Zimbabwe abandoned its own currency in 2009 after hyperinflation rendered the Zimbabwean dollar worthless.

The first step, according to the country’s finance minister Patrick Chinamasa, is that Chinese tourists would be allowed to pay for services in yuan. Zimbabwe would then be able to use that to pay off its remaining debt to Beijing.

The yuan has been making inroads on the continent. Kenya and South Africa both host clearinghouses that enable investors and traders to conduct transactions between local currencies and the yuan without going through the US dollar first. In June, almost a third of payments between South Africa and Greater China were settled in Chinese yuan, up from just 10.8% in 2014. Last year, Ghana began allowing banks to sell yuan. Now that the International Monetary Fund has admitted the yuan into its benchmark currency basket, some expect more central banks in Africa to include the currency in their foreign exchange reserves.

 

The goal of easing usage of the yuan is increasing bilateral trade, namely helping African countries export more to China. When Kenya launched its yuan clearinghouse in Nairobi this year with the National Bank of Kenya, the bank’s managing director Munir Mohamed said, “Africa should make sure that the renminbi is internationally accepted for conversion from renminbi and vice versa in order to balance trade between Africa and China.”

But doing more transactions in yuan may do little to help China and Africa’s already large trade imbalance. China accounts for a little over 20% of imports to Africa but only about 15% of exports from the continent to China. Over the past year, those exports have fallen while Chinese exports to the continent are increasing.

In Zimbabwe, despite its growing trade with China, the yuan may still be far from being a commonly used currency. Even though South Africa is one of Zimbabwe’s largest trading partners, the US dollar, not the rand, is still the most used currency, as highlighted by Gift Mugano, a trade expert at the Nelson Mandela Metropolitan University, when Zimbabwe added the yuan to its basket of currencies last year.

“Very interestingly, currency issues are so psychologically influenced, economic agents may not be comfortable to just accept one currency overnight when they were used to the US dollar. This is a complex matrix which the RMB will face in Africa,” Mugano said.

Credit- Reuters

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