24 June 2016

Zimbabwe: Why Is Zim Getting Droplets From China's Sea of Cash?

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key economic statistics from the world's second biggest economy, China, are mind-numbing.

China's Gross Domestic Product (GDP) stands at a staggering US$10,355 trillion for China -- and rising -- at 6,7% -- having cooled off from the dizzying upwards -- of 8% growth rates. Compare that with Zimbabwe's US$14,2 billion current GDP size -- sea versus pond. Banks in China, mainly the four state-controlled, warehouse a stupendous US$16 trillion in deposits. Given that China's currency is arguably undervalued, its 100 trillion yuan bank deposits are way over US$16 trillion. China is a trade surplus behemoth. Currently, its value of exports exceeds its imports by half a trillion dollars, a trade surplus of 2,7% of GDP. The Chinese government has over the years been using part of its trade surplus to buy bonds issued by the US government. Of the US$4 trillion that China has invested in financial assets, the majority is held as US Treasury bonds. Truly, China is metaphorically swimming in a sea of cash.

Zimbabwe touts China as its all-weather friend. Is it then not the mother of ironies that an economically stuttering friend seems, hyperbolically speaking, to be getting mere droplets from a come-what-may friend's sea of cash? The paradox is even more astounding -- China has not imposed economic sanctions on Zimbabwe and yet we have been for a long time facing a debilitating financial drought as a country. Captains of industry's now all too familiar wail about dry international lines of credit and government's lamentation that state enterprises are cut off from international sources of finance due to the infamous or even 'diabolic' US Congress-enacted Zimbabwe Democracy and Economic Recovery Act (Zidera) of 2001 does not make the slightest sense. Does the term international financier exclude Chinese sources? The Chinese are not beholden to the US and Europe as to be arm-twisted into starving Zimbabwe of much-needed cash injection into our comatose economy. During the life of Zimbabwe's Government of National Unity, the Treasury estimated that about US$10 billion was needed to reboot the economy. In all fairness, US$10 billion in comparison to China's US$4 trillion cash ocean is merely a puddle.

China is not afraid to spend. China is known not to shy from playing knight in shining armour at opportune moments, and in the most unlikely places. At the height of Europe's debt crisis, the famous Pigs near-financial Armageddon, China offered to pump money into Eurobonds. China did purchase a major marine business in debt-sinking Greece as a strategic investment to facilitate trade with South-Eastern Europe. China is investing heavily in the former Soviet-influenced and economically-struggling European countries, such as Poland. There must be something fundamentally amiss when as a country we are failing to access meaningful finance from our supposedly all-weather friend's sea of cash. This conundrum begs an answer.

A recent paper from the Washington-based economics think tank, Brookings Institute, provides a simple but profound insight into Beijing's political economy mind-set: China's main concern is making China a rich and powerful geopolitical force, gunning for global dominance. Shared main concern falls in the realm social psychological behaviour. China's all-consuming passion to create a modern geopolitical force explains its stubborn resolve not to be cowed into accepting economic orthodoxies such as fully liberalised economy. For China, according to the Brookings Institute, market economy is just one of the many strategic options in its portfolio of stratagems.

Rather than holding market economy as a desired end, China treats it as one of the possible levers to pull. This is why China prefers the visible hand of the state to determine the value of its currency, in defiance to the practice ofletting value of traded currency float, leaving it to the invisible hand of the market to set price of traded currencies. China is a trade surplus powerhouse -- if Beijing were to surrender to the invisible hand, the renminbi's value would appreciate and compete eyeball to eyeball with US dollar. China seems not to want that -- it needs a weak renminbi to make its exports relatively cheap.

China's mother lode, according to the Brookings Institute, is the thesis that no modern country has attained economic prosperity without a massive export-led economic growth. Our looking east should harvest this insight.

China has over the years pumped trillions of dollars into US government bonds -- it loans money to its economic and geopolitical nemesis. This constitutes a serious puzzle. China's large scale purchase of debt paper issued by the US Treasury is a huge vote of confidence in the US government's stewardship of the economy. As long as it supports its drive towards being a rich and powerful geopolitical entity, China will do business, even with its most powerful ideological and economic competitors. The corollary presents a hard truth that might be difficult to swallow in certain quarters. China does not use ties of camaraderie as its north star in making financial investment decisions. China simply follows where the rich lodes are, period. An all-weather friend might not even get a droplet from its sea of cash if doing so does little to advance China's foreign policy.

A very uncomfortable question is in order: what is stopping us as a nation from selling Treasury and corporates bonds to Chinese state and non-state investors, offering them better rates than competing nations? Real interest rates are currently 2,35% in China. There is nothing stopping Zimbabwean companies from offering competitively priced corporate bonds to the cash-rich Chinese. Equally, nothing is stopping our Treasury from selling bonds (with at least a 10-year maturity). Tugging the sanctions fall guy will be a blatant canard that would embarrass even the (in) famous Goebbels. China is a net Foreign Direct Investment (FDI) source, meaning it has a huge appetite for pumping out huge sums from its sea of cash in search of investible projects. Net FDI, in the case of China, means Beijing invests more outside than other nations are investing in it. That net FDI investment came short of US$700 billion last year. Droplets of cash into Zimbabwe must be replaced by torrents.

It is time we faced the unpalatable truth as a nation, all us of: we are getting droplets from China's cash sea not because of sanctions while it pours trillions into the economies of our 'sworn enemies'. If we take the time to soberly analyse why China is comfortably buying American companies, lend trillions to 'diabolic' America and even consider lending money to the EU, our economic woes will be over. Let us face it -- ours is an inside job -- we hate the sandwich we have made for ourselves. China looks West. In fact, China looks anywhere -- as long as it pushes it closer to being exceedingly rich and powerful. This should be the most important takeaway from our Look-East policy.

The legend seafarer bawled: "Water, water everywhere, but not even a droplet to drink." He might as well have been referring to us.

Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer reviewed academic journal. 

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