Submitted by Taps Coogan on the 25th of April 2019 to The Sounding Line.

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Kyle Bass, founder of Hayman Capital Management, recently discussed his intensifying concerns about the Chinese economy in an in depth interview with Hedgeye. Kyle discusses why China’s ‘dual deficits’ (fiscal and current account deficits), closed capital account, increasing US dollar denominated debt, and massive leverage are creating the risks of a major slowdown in China’s economy.

 

Kyle Bass:

“… You’ve seen a pretty big credit impulse in the first quarter from China… The stock markets have taken that and run with it but I think it’s very important to understand where that credit went. Credit is not making it to the small and medium sized businesses in China. What you’ve seen is China’s enormous expansion has come from their infrastructure spending, their local government financing vehicles or their vehicles that have been financing infrastructure, and their SOEs (State Owned Enterprises) that are, some of them are, widely unprofitable… At the beginning of every year the credit impulse always looks enormous and that has a lot to do with the fact that a lot of the loans in that system are one year loans and we have a saying here at Hayman that a ‘rolling loan gathers no loss…’ What we believe is if you just take a 50,000 foot view of China Inc., China’s running an augmented fiscal deficit, i.e. the government number plus the local government financing number, of roughly 10% of GDP, so running a fiscal deficit of -10%… They will run a current account deficit from now on… You have a dual deficit nation with a closed capital account. It’s not like a dual deficit nation, like the US, with a free capital account and also a hegemonic position. You can’t run a dual deficit economy with a closed capital account and stimulate the way you’ve stimulated in the past when you had a positive current account… You’re going to see (China) turn down… Chinese numbers you have to take with a grain of salt, or maybe a bucket of salt, but if you just look to their trading partners… South Korea’s exports are down 8% year-over-year in March. Germany’s manufacturing PMI: 44.1 That was the worst PMI in Germany since 2012. Japan’s Tankan March survey of large manufacturers was at a six year low. So, China can tell us that they’re growing and their really stimulating, but their largest trading partners are telling you that things just are not very good…”

“If you running a secular current account deficit, coupled with a fiscal deficit that is the largest in the world bar none, in gross terms,… it is really difficult to… expand credit, use your FX balance to acquire the iron ore, the food, the oil, and everything that it takes for you to buy that you don’t already have as a resource domestically. You can’t do that because you’re already down to the minimum levels of working capital or FX reserves that you need just to operate your economy…”

“I don’t know if I can tell you that they can’t do it (re-stimulate growth) for three or four or five months, but I can tell you that by the end of this year, no one will believe the Chinese numbers…”

“…Their fiscal deficit is expanding and they are running out of dollars. back then (2016), they were still growing their dollar balance. So they could expand credit domestically, grow GDP domestically, and… dollars of working capital was growing so they could just spend it to do so. Now, they can’t engage in a massive construction boom because they don’t have the dollars to buy the iron ore and the galvanized steel and everything else that they have to buy that they don’t have sourced domestically.”

“You have to separate the world of China into two worlds. One is their domestic world where they control the printing press…, the price level, the police, and they control the narrative. They control all four of those things and I actually believe that China can do whatever they want domestically to… paper over or fix any economic ills that are derived by over-levering RMB. But when you look at China, China unfortunately has to interact with the world and I say unfortunately from their perspective because I think they could keep this going a very long time if they didn’t rely on the rest of the world’s resources… They are desperately short all these resources. Therefore, they have to constantly import them… In four short years, their imports of crude (oil) have gone up 50%… This is China’s problem. This is the ‘you can’t have your cake and eat it too forever’ problem. They have to spend dollars (to import) and they are running out of them…”

“…What the Chinese are doing is their actively borrowing dollars in the banking sector… and corporations globally, and this is a really important point to make…. Let’s just say Tencent does a $2 billion bond issue in Hong Kong or in Europe they do a two billion euro issue. That money is actually fungible and usable by the federal government of China. It’s technically Tencent’s. They technically have their own claim to those assets, but that money gets wired into the PBoC and China Inc. can use that money for working capital, i.e. trade…”

There is much more to the interview, so enjoy it above.

As we noted here, China has created over three times as much money supply as the US since 2008.

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