China leads Zim towards recession

via China leads Zim towards recession – DailyNews Live Gift Phiri, NEWS EDITOR • 12 January 2016

HARARE – The contagion from China’s ongoing financial meltdown will likely drive Zimbabwe into a worse recession this year, experts warned this week, after Harare ill-advisedly adopted the yuan as a reserve currency this month.

This comes as  the People’s Bank of China, the central bank, last Thursday devalued the yuan to 6.5646 per dollar, the weakest point since February 2011, heightening fears that turmoil in China’s financial markets could send Zimbabwe into a tailspin amid domestic outrage over government’s unpopular move to adopt the yuan.

The use of the yuan is in lieu of cancellation of a modest $40 million Chinese debt, with influence-peddling Beijing projected to reap much more than Harare in the murky deal, according to an Oxford research institute NKC African Economics.

Independent Harare economist John Robertson warned that the ongoing currency collapse in China was projected to drag Zimbabwe down the drain and see economic activity fall precipitously.

“China’s problems have impacted on commodity prices for all of Zimbabwe’s main exports, gold, platinum and tobacco,” Robertson told the Daily News yesterday.

“For all of these, we are likely to receive lower incomes while the current recession continues and that is likely to last until oil and gold prices start rising again.”

International Crisis Group’s Southern Africa project director, Piers Pigou, said Zimbabwe’s adoption of the yuan was part of efforts to facilitate trade, but warned that the currency will face fierce resistance from Zimbabweans.

“It’s not likely we will see much yuan being utilised on the streets,” Pigou told the Daily News.

“I honestly can’t see ordinary Zimbabweans buying into that.”

He said if devaluation of the yuan is retained or taken further,  he presumed this will affect the trade deficit.

The use of the yuan in Zimbabwe will not make a difference because China wants to earn US dollars, not yuan, adding the amounts involved are relatively paltry in the bigger scheme of things, as they relate to Chinese trade elsewhere on the continent.

“Nevertheless,  it’s an important market for Zimbabwe given its own shrinkage and restricted options,” Pigou said.

Finance minister Patrick Chinamasa has said the use of yuan in Zimbabwe “will be a function of trade between China and Zimbabwe and acceptability with customers in Zimbabwe.”

This comes as government plans to dramatically ramp up use of the yuan to  repay Chinese debt and shore up liquidity, as Harare struggles to pay government workers, pensioners, and bankroll public service.

The yuan was first announced as legal tender in 2013, but has not been in circulation largely due to scarcity.

The sudden collapse of China’s global equities markets that began last week has unnerved Zimbabwean economists, with Beijing suffering the biggest slide in the yuan in five months, forcing a halt in Shanghai stocks two times inside a week.

Economists expressed concern this week that the world’s second largest economy can no longer be counted on to power Zimbabwe’s stuttering economy, even as it has become Harare’s second largest trading partner after South Africa.

Stephen Chan, professor of world politics at the School of Oriental and African Studies at the University of London, told the Daily News yesterday that trade flows will suffer, but said aid projects and huge infrastructural regional funds will be unaffected.

“They are financed from China’s huge foreign reserves amounting to US$3 trillion and very huge domestic reserves,” Chan said.

“So, trade flows may suffer, but the power station project should proceed. As for Zimbabwe, to come to depend so much on only one country, it doesn’t matter which country, is naive.

“Of course I understand that, at this moment, there may not be much choice.”

Harare is looking up to the Asian giant for financial bail out even as Beijing’s woes are snowballing into a longer lasting crisis.

Earlier last month, Chinese leader President Xi Jinping visited Harare where he inked 10 economic agreements with his Zimbabwean counterpart President Robert Mugabe, including a $1bn loan to expand the Hwange thermal power plant.

Pigou said despite its financial problems, China will continue to demonstrate solidarity with Zimbabwe.

“Investments will proceed as Zimbabwe demonstrates its capacities to fulfil its side of the deal,” he said.

“We just need to see exactly what that constitutes. Until then we will be left swimming in a sea of speculation which in the bigger scheme of things is not particularly helpful.

“But one is sometimes left with an impression that this is exactly how the Zimbabwean authorities like it!”

Pigou said the slowdown in the Chinese economy has serious implications for the African continent in terms of slow down in demand.

“But don’t see it impacting too much on the components of the $60 billion undertaking Xi made for the next three years,” he said.

“The deals with Zimbabwe are an important part of this commitment and key aspects of this investment is in turn a very important part of longer term infrastructural investment, critical for underpinning Zimbabwe’s longer term economic recovery.

“But it is not a panacea to Zimbabwe’s economic woes and will not address ZimAsset projections that are set out as election promises in 2013 before we head back into election mode in a couple of years.

“It does not expedite or help the debt arrears repayment obligations. It does not address unemployment woes.

“It does not resolve liquidity constraints. It is also not a freebie, even if one loan, $40 million I think, was written off in a largely symbolic gesture.

“China’s own economic constraints are likely to make it more prudent than with the deals it engages in.  It will want some level of certainty regarding issues of repayment.”

This also comes as Beijing’s leaders have backed off from taking more resolute steps to shore up slowing growth, but has buckled to mounting calls for dramatic devaluation of the yuan.

“The steps China has taken to regulate its stock market are hesitant and not nearly strong enough for the difficulties the economy now faces,” Chan told the Daily News.

“Analysts have predicted this for a long time — that the unregulated stock market would be an Achilles heel.”