(Mike Maharrey, Money Metals News Service) In yet another sign of growing global de-dollarization, Chinese mining companies in Zambia are now paying royalties and taxes in yuan.
As Bloomberg put it, this is the “latest sign of the growing acceptance of the currency on the [African] continent.”
Zambia ranks as Africa’s second-largest copper producer.
According to the Bank of Zambia, the government began accepting tax payments in yuan in October.
“A large portion of copper exports go to China, and the Chinese mining firms already receive some, if not all, of their payments for their exports to China in renminbi. The Bank of Zambia has the diversification and building-up of its reserves as a key objective, and purchasing renminbi enables the bank to actualize this objective.”
A Zambian central bank official also said holding part of its foreign reserves in yuan would enable the country to service its Chinese debt in “a more cost-effective manner.”
Zambia is the first African country to confirm the acceptance of the yuan for mining-tax payments. Previously, taxes were paid in U.S. dollars.
In 2018, the Bank of Zambia imposed rules requiring foreign mining companies operating in the country to pay royalties in dollars. In 2020, it expanded the rules to cover all mining-tax payments. The goal was to increase its dollar reserves.
The move is part of a broader Chinese strategy to internationalize the yuan and raise the currency’s status on the global stage.
China ranks as the world’s top creditor. As Bloomberg explained it, “China is leveraging its position as the world’s largest creditor to help broaden usage of the yuan, offering overseas borrowers the chance to benefit from economically depressed interest rates at home by ditching the dollar.”
Last year, Kenya converted dollar loans owed to China to yuan-denominated debt. Ethiopia is reportedly in talks to follow suit, and Zambian officials said they would also consider a similar move.
Kenyan officials said converting Chinese railway loans from dollars to yuan will slash its debt-servicing costs by $215 million annually.
The Chinese are taking a loss as Chinese interest rates are well below those associated with the dollar. However, analysts say the Chinese are willing to stomach the losses to boost the yuan.
“If the borrowers pay less, then the lender gets less,” Carnegie Endowment for International Peace senior fellow Michael Pettis told Bloomberg. “The benefit for China in exchange for less revenue is that the renminbi becomes a more internationally used currency.”
Analysts also told Bloomberg the approach makes it easier for borrowers to purchase Chinese goods with yuan, “elevating the currency’s role in trade settlement and financing.”
Chipping Away at the Dollar
The dollar is in no danger of losing its status as the primary global reserve currency, but de-dollarization is chipping away at its dominance. It’s clear we’re moving toward a “multipolar” world where several currencies, along with gold, are making up a growing share of global reserves.
Central banks worldwide are diversifying away from dollars and buying gold. We’ve seen central bank gold buying eclipse 1,000 tonnes for three straight years. To put that into context, central bank gold reserves increased by an average of just 473 tonnes annually between 2010 and 2021.
We’ve also seen declining dollar reserves.
As of the end of last year, dollars made up 57.8 percent of global reserves. That is the lowest level since 1994, representing a 7.3 percent decline over the last decade. In 2002, dollars accounted for about 72 percent of total reserves.
Why are so many countries spurning the dollar?
Many are concerned about the weaponization of the U.S. currency. In an article published by the Atlantic Council, Kimberly Donovan and Maia Nikoladze point out that “central banks that are worried about getting sanctioned, want to protect themselves from a potential global financial crisis, or both have been stacking up gold at record levels.”
There are also growing worries about the U.S. government’s fiscal irresponsibility. In October, the national debt pushed above $38 trillion, and there is no sign that the borrowing and spending will slow down anytime soon. At some point, people become wary of loaning their fast-spending, drunk uncle more money.
Even a modest de-dollarization spells trouble for the federal government and the U.S. economy.
In a nutshell, the United States needs the world to need dollars.
The U.S. depends on a global demand for dollars supported by its reserve status to underpin its massive government. The only reason Uncle Sam can borrow, spend, and run massive budget deficits to the extent that it does is the dollar’s role as the world’s reserve currency. It creates a built-in global demand for dollars and dollar-denominated assets. This absorbs the Federal Reserve’s money creation and helps maintain dollar strength despite the Federal Reserve’s inflationary policies.
If the world needs fewer dollars, they will begin to return to the U.S., causing a dollar glut. This will increase inflationary pressure domestically as the value of the U.S. currency further depreciates. In the worst-case scenario, the dollar could collapse completely, leading to hyperinflation.
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
