Taps Coogan – September 22nd, 2021

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Kyle Bass, founder of Hayman Capital Management, has been a prominent ‘China Bear’ for years, making him one of the early voices to warn of credit problems in China’s banking system and to note the moral hypocrisy of ‘woke’ Western companies falling over themselves to do business with in a country with such grave human rights violations.

Well, after years of being met with eye-rolling, it’s looking increasingly likely that Mr. Bass may have the last laugh on China as Xi’s ever-widening crackdown on China’s economy intersects with the Evergrande’s unraveling.

So what does Mr. Bass have to say now?

 

Some excerpts from Kyle Bass:

“I think it’s really important to understand what Xi is looking to do. They are experiencing similar problems that we are in the US and that other nations around the world are experiencing with the largess of central banks. China’s credit system has grown at huge percentages of GDP every year since the Financial Crisis of 2008-2009. They’re entering this period of weakness with over $50 trillion of credit in their system and their GDP is around $15 trillion. To put that in perspective, the US, we entered our financial crisis with about $17 trillion of GDP and about $17 trillion of on-balance sheet credit and another call it $12 trillion off balance sheet… The point being they’re about 3.6 times and we were about 1.7 times and they’ve only been at the capital markets business for about 20 years…”

“Chines birth rates are collapsing. They are at about 1.4 births per woman and you need to be at 2.1 to just sustain your population. So, Chinese population dynamic are at a critical level… Chinese men can’t afford housing so they’re all living with their parents… What Xi is trying to do is he is trying to rein in property prices and he is trying to do it as quickly as possible… Everyone that believes that China is going to grow at 6% a year ad-infinitum is just dead wrong…”

“Look what they’ve done to their gaming sector. Look what they’ve done to their for-profit education sector. They’ve basically pulled the plug on many sectors in their economy… You’ve got to realize you’re not investing in a real economy over there. You still have an economy with a closed capital account. They have one-way capital flows: dollars in. Imagine if dollars start heading out.” 

For what it’s worth, we couldn’t agree more.

The Evergrande crisis is a watershed moment for China and probably the global economy. As we’ve noted over and over, the mainstream narrative on China is terribly outdated.

Whether or not Evergrande gets a bailout is not the point (Presumably, they will get bailed out). The point is that China is sitting on a dangerous real-estate & financial bubble, its population is peaking, its economy is stalling, and its communist-dictator-for-life has decided that he wants a return to some sort of soft Cultural Revolution. That’s why Evergrande is failing now, as opposed to three years ago, when it was just as dangerous of a company. 

For perspective, US subprime debt started to sour in 2006. New Century went under in April, 2007, Baer Sterns and BNP starting bailing out and then liquidating hedge funds in the Summer of 2007. Then American Home Mortgage, Northern Rock, NetBank, all experienced bank runs or filed for bankruptcy of some sort in the Summer and Fall of 2007. All of that occurred before the Dow Jones hit its cycle peak in October, 2007. In other words, all of that was ‘contained’ in the market’s eye… until it wasn’t. And that October market high proceeded the truly heavy selling by nearly a year. The real selling kicked-in in September, 2008 when Lehman collapsed. The market didn’t bottom for another six months. 

We are barely one week into the Evergrande default and everyone is rushing to declare it contained. Again, that’s missing the point. The significance, or lack thereof, of Evergrande’s collapse will only be clear years from now.  

Here is an exit question. What exactly is the global growth narrative ex-China?