Minsky Moment in China? Impact for Oman?

It is not secret that corporate debts in China are extremely high and household debts are still rising

The Financial Times , as many other papers around the globe, were heading their editions in quoting Zhou Xiaochuan, the head of China’s Central Bank, ‘If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a Minsky Moment’.

What is a Minsky Moment? And if it hits China, what does it mean to the Sultanate of Oman in the light of China’s promised investment of over US$10.7bn into the Sino-Oman Industrial City project (an 11sq km endeavour), which sits within the giant Duqm Special Economic Zone (SEZAD), which is a great hope to boost the sultanate’s economy?

A moment, when suddenly assets dramatically drop in value because during a long period of increasing values of investments into assets lead to speculation, is called Minsky Moment. It comes to liquidity or cash flow problems because the assets do not generate enough cash to pay off the debts, eg because of declining property prices. Eventually such situations prompt lenders to call in their loans.

Such market failures make economies fall into crisis after an extended period of market speculation or unsustainable growth.

These situations are amicably known as Minsky Moment. Hyman Minsky, an economist and professor, famous for arguing the inherent instability of markets, felt that long bull markets only ended in large collapses.

Now, when China’s Central Bank governor warns in unusual straight words, what should the rest of the world think?

It is not a secret that corporate debts in China are extremely high and household debts are still rising.

The IMF called China’s level of debts ‘dangerous’ in its August statement. Very restricted cross-border investments and financial movements as well as currency restrictions are - amongst other negative impacts - enhancing Shadow Banking and other financial risks in China.

China’s One Belt One Road (OBOR) initiative follows basically the idea to ‘re-establish’ the ancient Silk Road economy and thus embraces huge investments in order to advance numerous objectives.

Foremost among these priorities is China’s need to assure domestic energy security as the world’s largest consumer of energy and second largest importer of crude oil.

However, the paramount effort plans to use increasing influence in the region based on such economic ties as a platform to project China’s rise to become a recognised world power and international political influencer.

Oman’s strategic importance due to diplomatic cleverness and the sultanate’s brilliant geographical situation obscures the extent of China’s interests in Oman. Remember that soon after Mao Zedong’s death China and Oman developed busy trades in crude oil despite the fact that during the Dhofar rebellion in the ’70s Oman and China were on very hostile terms because China was sponsoring Marxist rebels in Dhofar.

This approach appears rather being driven by hard-bitten economic interests than by ideologies.

And for the Sultanate of Oman, there is no indication to suggest that Oman is contemplating a shift in its western foreign policy orientation and still, China stands to benefit by increasing its footprint in Oman.

In this light, if China’s economy after all will undergo an effect of being into a Minsky Moment, there are possible impacts to Oman’s economy, which could be that a mega-investment as it stands with Sino-Oman Industrial City, will be on the line. The project currently promised to be completed by 30 per cent in 2021, one might be tempted to opt for a Plan B; i e what to do if nobody comes to build factories and facilities in Duqm.

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Ernst Grissemann

The author is managing director of Bauer Nimr LLC.

The views expressed here are solely those of the writer in his private capacity and do not in any way represent the views of Muscat Daily

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