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African and Mideast Business Zimbabwe to adopt Chinese yuan as legal currency after debt cancellation

While Zimbabwe’s decision to adopt the Chinese yuan as legal tender is largely a political message by an anti-Western government, it also illustrates China’s economic power in Africa.

SeongJoon Cho/Bloomberg

In an unprecedented move that signals China's growing global influence, Zimbabwe has announced that it will adopt the Chinese currency as legal tender.

The announcement came after China cancelled $40-million (U.S.) in Zimbabwean debt earlier this week. China is already Zimbabwe's biggest trading partner, and Beijing is often praised by the Zimbabwean government, which has adopted a "Look East" policy after years of sanctions by Western governments.

While the decision to adopt the Chinese yuan as legal tender next month is largely a political message by an anti-Western government, it also illustrates China's economic power in Africa, where Beijing has rapidly become a major investor and the continent's biggest trading partner.

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Zimbabwe abandoned its own currency in 2009 after a spectacular bout of hyperinflation, climaxing with the printing of banknotes in denominations of 100-trillion Zimbabwean dollars, which could barely cover the cost of bus tickets for a week.

The government finally stabilized the hyperinflation crisis by adopting foreign currencies – mostly the U.S. dollar and South African rand – as legal tender. This boosted the economy, but it rankled some Zimbabwean officials, who resented U.S. sanctions on their county. The rand, meanwhile, has been shaken by the sharp decline of its value in recent months.

Under the new policy, the U.S. dollar is likely to remain the most popular currency, but the yuan would become an alternative, primarily among Chinese tourists and traders at first.

Zimbabwe's Finance Minister Patrick Chinamasa said the use of the yuan will be dependent on "trade between China and Zimbabwe and acceptability with customers in Zimbabwe."

In a statement, he added: "There cannot be a better time to do this. It is now about looking at the modalities, specific sectors and how it can be done."

Zimbabwe's autocratic President, Robert Mugabe, lauded the decision by the government's finance officials. Speaking on Tuesday, he said the move would "inject liquidity" into the country's market and would offer a "new possibility for us."

The central bank Governor, John Mangudya, said the yuan would be promoted in Zimbabwe since it would minimize the exchange-rate losses in trade between the two countries.

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But some local economists told Zimbabwean newspaper NewsDay that they don't expect the adoption of the yuan to make any significant difference to the economy.

Earlier this month, Chinese President Xi Jinping was given a hero's welcome during a visit to Zimbabwe, where he announced a $1-billion loan to finance the expansion of a power plant. The Chinese leader then attended a China-Africa summit in Johannesburg and announced $60-billion in new credit and financing for Africa.

Zimbabwe is reported to have received more than $1-billion in low-interest loans from China over the past five years.

The yuan has been winning acceptability worldwide in recent years, although never as a legal tender in another country until now.

The International Monetary Fund decided last month to include the yuan in its benchmark currency basket. Ghana has begun allowing banks to sell yuan, and Kenya and South Africa both have clearinghouses that allow traders to make transactions between local currencies and the yuan, without using the U.S. dollar as an intermediary.

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