Does Zim really ‘yearn for yuan?’

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Reserve Bank of Zimbabwe governor Gideon Gono’s proposal in November to peg a new Zimbabwean dollar to the Chinese yuan made a splash of headlines.

The Asia Times, for example, announced “Zimbabwe’s Yearn for Yuan”, while Al-Jazeera stated “To Yuan or Not to Yuan, That is the Question”.

But the media excitement is misplaced for now. Gono and his allies in the Zimbabwe African National Union-Patriotic Front (Zanu PF) cannot institute the peg with the current government in place. Indeed, Finance minister Tendai Biti from the Movement for Democrat Change-Tsvangirai (MDC-T) made clear Zimbabwe would continue using its multi-currency system until the economy stabilised.

If Zanu PF gains a clear victory that puts a partisan at the helm of the Finance ministry, the yuan peg could become a reality. While this outcome is far from assured, its possibility raises a number of important questions: What are Gono’s and Zanu PF’s motivations behind the proposal? Can the peg meet the expectations that Gono has set? Are there any viable alternative monetary regimes?

From Zanu PF’s perspective, the peg makes perfect sense. Tying Zimbabwe’s monetary regime to the Chinese would be a logical step forward in its “Look East” policy. President Robert Mugabe began reorienting his country eastward in 2003 as Western pressure over land seizures and human rights abuses grew.

Pragmatically, he believed Asia — namely, China, Malaysia, North Korea, Iran and Indonesia — could compensate for the loss of Western investment. Asia also fits well with his party’s anti-colonial narrative. “It is very important for us in Zimbabwe,” he explained in 2005, “to develop the Look East policy because that is where people who think like us are, same history of colonialism as ourselves, (and) people who have started developing their economies.”

China has become increasingly central to the policy. In the first nine months of 2011 alone, Sino-Zimbabwean trade increased 62%, totaling
$171 million according to Reuters. China has made investments in a host of industries including telecommunications, construction and most importantly mining. Just last November, Chinese investors agreed to put
$700 million toward developing Zimbabwe’s mining sector.

In promoting the yuan, Gono seems to base his arguments more on Zanu PF ideology rather than economic reality. He told state media that “the US dollar is fast ceasing to be the world’s reserve currency and the eurozone debt crisis has made things even worse . . . There is no doubt that the yuan, with its ascendancy, will be the 21st century’s world reserve currency.” The yuan, however, is far from rivalling the dollar in this respect. Today, the dollar accounts for 60,7% of global reserves followed by the euro, pound sterling and Japanese yen. The yuan’s share of reserves is negligible due to the strict capital controls China places on its currency.

Until China loosens these controls, little international trade can be denominated in yuan, which precludes its adoption as a reserve currency. The dollar currently accounts for 85% of trade compared to 0,3% of exchanges using China’s currency. Thus, a yuan peg would limit Zimbabwe’s access to international markets at least in the short and medium term. China’s rapid economic growth portends to the yuan gaining ground, but it will take decades to become a substantial portion of central bank reserves around the world.

The yuan’s undervaluation is widely recognised, so it will continue to face upward pressure to appreciate. Conversely, the Jacob Zuma administration intends to devalue the rand. The peg thus would exacerbate the trade deficit by making Zimbabwean exports to its southern neighbour more expensive while South African imports would become cheaper.

The multi-currency system used in Zimbabwe today has served an important transitional role. The government adopted the system in January 2009 as inflation rates — peaking at 79,6 billion percent just a few months prior — killed the Zimbabwean dollar. A host of foreign currencies — the rand, euro, pound, US$, metical and kwacha — became recognised legal tender in Zimbabwe, but the US$ soon supplanted the others. This “dollarisation” reversed the run-away inflation and helped resurrect the country’s short-term credit market.

Dollarisation, however, is not the optimal long-term solution for Zimbabwe. Pragmatically, a paucity of US coins in circulation makes it difficult for retailers to make change. And, from a nationalistic perspective, both Zanu PF and MDC-T agree Zimbabwe should eventually return to its own dollar.
But, given the RBZ’s lack of credibility, simply bringing back and floating the dollar is not an option. Thus, Zimbabwe has to incorporate itself into credible, fiscally sound framework.

The Common Monetary Area (CMA) offers just such a framework. The CMA is a monetary union tying together many of Zimbabwe’s largest trading partners — South Africa, Lesotho, Namibia, and Swaziland.

Joining the CMA would come with substantial economic and fiscal benefits. Further integrating its economy with the neighbourhood, namely South Africa, would bring down barriers to capital flow, thereby boosting Zimbabwe’s struggling long-term lending market. Additionally, the Zimbabwean government would gain much-needed revenues from seigniorage, which roughly speaking is the fiscal gains from printing currency for less than its actual worth.

The process of joining the CMA, however, would not be simple. CMA membership might have a relative advantage over a yuan peg in this respect given poor labour practices and sale of shoddy products (known as zhingzhongs) by Chinese companies has decreased their popularity among Zimbabweans.
Moving forward, Zanu PF will continue looking east to the yuan, but the peg is far from a fait accompli. Rather, the upcoming elections will determine the future of Zimbabwe’s monetary regime — a future that will prove much more promising if Zimbabwe’s leaders look south.
—Andrew C Miller / All Africa.com