Submitted by Taps Coogan on the 6th of August 2019 to The Sounding Line.
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Kyle Bass, founder of Hayman Capital Management, recently spoke with CNBC about the accusation that China is manipulating its currency. As Kyle Bass notes, for years China has been forced to routinely defend the value of its currency in order to maintain its quasi-official peg to the US Dollar. With the US Dollar trading near multi-year highs and with capital flight out of China accelerating, China is being forced to deploy significant dollar reserves to defend an increasingly untenable peg to the dollar. The recent trade war escalations are simply giving Chinese leaders an excuse to do something that many thought was inevitable: allow the value of the Yuan to fall closer to its ‘free-market’ exchange rate. The fall in the Yuan is due to a lack support from the Chinese, not a deliberate push lower.
Some excerpts from Kyle Bass:
“It’s important to realize that the Chinese have only been at this capital markets thing for the last fifteen years and while they’re smart… it’s like they’re at a circus spinning 20 plates. They have to have all plates spinning all at once and if one of them falls, they all fall… What’s happening in China is they have to have dollars to sell to buy their own currency it hold it up. If they were to ever free float their currency, I think it would drop 30% or 40% and the reason being is that they claim to be 15% of global GDP in dollar terms but less than 1% of global transactions settle in their own currency. And so they prop their currency up. Everyone’s calling them a currency manipulator. They’re trying to hold this whole thing together. If they were to let it go and allow all the wealthy Chinese to get their money out and buy more houses in Vancouver, and London, and the US, and send more of their kids to school in the US, you would see their currency collapse… In the end, you’ve got to have dollars to support it and they’re running out of dollars and so what they did is they just stopped supporting it. They didn’t intentionally weaken it. They just stopped supporting it at a certain level.”
“Back a month or so ago when we were negotiating with the Chinese, we had a 150 page document that they had said that they were going to sign and the night before they took 50 pages out of the agreement. Anything that was measurable and enforceable was taken out… What just happened here (in the most recent round of negations) is China said ‘you need to drop all tariffs on all of our goods. We need you to stop disallowing Huawei in the US. We need you to release the Huawei CFO, before we even engage in talks.’ And we say ‘that’s not going to happen,’ so the Chinese negotiators stood up and walked out of the room… The Chinese are the ones that have been negotiating in bad faith all along.”
“…You have to remember (China) needs dollars to buy everything that they import. They’re desperately short energy, desperately short basic materials, they’re desperately short food, and they have to pay dollars for that. They can’t pay RMB (Chinese Yuan), or monopoly money… They have to actually use real currency and so if they are running out of real currency and they’re running a current account deficit and a fiscal deficit, then what happens next is they start to lose control of their currency and I think that’s what you seeing some of today.”
“… Back to South Korea, 1998. They supposedly had the largest pile of FX Reserves in South-East Asia during the Asian Financial Crisis in 1997 and 1998 and they called Treasury Secretary Summers at the time and said ‘Mr. Summers, we need more dollars’ and he said ‘What do you mean. You guys have the largest reported stack of dollars in Asia?’ and they said ‘Well, we kind of already allowed our banks to borrow them from us and they sold them. But we still hold them as an asset on our balance sheet.’ Look at the Chinese banks’ balance sheets in the last 12 months. They’ve inverted from being massively USD heavy to massively USD short. They’re selling dollars in the forward market to try and prop their currency up and at some point in time that stops, and I think that’s somewhere around now.”
There is a bit more to the interview, so enjoy it above.
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