Kyle Bass Explains On The Dangers Of China Theft And Agression

Kyle Bass, founder and chief investment officer at Hayman Capital Management, joins CNBC’s “Closing Bell” to discuss China trade talks and a recent ProPublica investigation about his connection with RNC Co-chairman Tommy Hicks Jr.

RNC co-chairman

Kyle Bass Explains His Connection With RNC Co-Chairman

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Transcript

Joining us now to discuss in a CNBC exclusive interview longtime China bear Kyle Bass who is founder and chief investment officer at Hayman Capital Management. Very good afternoon to you. Thanks for joining us. Good afternoon Wilfred ever you're. Very well thank you. Very well and let's talk about the trade talks restarting. How optimistic are you that a deal is reached. Let's say just this side of the new year.

Well at first you referred to me as a longtime China bear. I like to call myself a China realist. But I would like to know when you look at what the Chinese did in the last negotiation it was about one hundred and fifty page agreement and the night before. Both sides were to sign the agreement. The Chinese took 50 pages the core of the agreement and threw it away. And so they they won't sign anything that's either measurable or enforceable. And and trade rep Pfizer is pushing something that is both measurable and enforceable because every deal the Chinese have signed with us since they're essentially into the WTO in 2001. China never lives up to their promises.

So at some point in time one of one of our administrative officials has got to hold their feet to the fire.

And this is kind of the battle of cultures because the Communist Party doesn't doesn't want to submit themselves to anything that's measurable or enforceable. I don't think an agreement can be had.

But look Karl how much is the trade issues a swing factor in your back. So you're a realist cases you'd like to put it on China. Would you be bearish either way and would you be incrementally bearish if things broke down.

No I think it's important to focus on a couple of things with trade. So first of all trade is trade is so it's so nominal it's so minimal when you look at our relationship with China it's really IP theft. It's stealing the lying the cheating the the thievery of of all of the US is let's say what we produce best here in the US is our innovation and our and our intellectual property. And they they seem to take it at will and so I think it's important that trade like if we're talking about 500 billion dollars worth of trade and potentially putting 25 percent tariffs on it we're talking about a little over 100 billion dollars the Chinese economy is 13 trillion the US economy is 20 trillion and we dedicate so much time to it it's really nothing. What's important here is restructuring our relationship with China. You heard FBI Director Ray say a couple of days ago that there are 1000 intellectual property theft cases actively being pursued by the FBI and all of them find their way back to China. So we have to stop allowing China from stealing from us. And I think it's important that these trade negotiations are but an agreement that we are forcing them to reset their their entire relationship with us. You think it's going to work. I mean clearly I don't think it's going to work. I know I know Manute chin and had his Cordray are our pro China and maybe pro China even after he comes out of the Treasury and I think that lighthouse is more of a realist and looking at at the national security of our country.

How are you expressing this this view right now. Because I believe you sold out of the Chinese currency. Short. Ahead of that sort of trade tensions last year. So what exactly are you doing to bet against China.

Yeah I think it's a good question Sarah. I think I've spent the better part of the decade studying China and the more and more and more I study all the different aspects of our relationship and the manner in which the Communist Party operates. It has become more of a personal passion of mine and I don't want to be conflicted with let's say financial incentives at this point in time. So I we covered our Chinese positions we have positions in the rest of Southeast Asia but nothing directly in China. Because I think it's the epicenter of U.S. national security. And I think I think the greatest risk to our security is China over the next 10 20 years and we better pay a lot of attention to it right now. So there's no trade expression here it's just Sarah when you think about the fiduciary responsibility of institutional investors in the US how can you invest in a market where there is no rule of law. How can you buy a company that doesn't adhere to the same auditing standards as U.S. companies. How can you as a fiduciary own a variable interest entity in Alibaba when all you own is a small piece of a piece of paper that references something out of the Cayman Islands. So if you lose money there you should be sued by whoever your fiduciary for and you're going to lose that suit. And so I don't I don't understand how fiduciary can buy these things. It's interesting to hear your answer there about how you're not in the trade because of the conflict because as you know there was this ProPublica story. Out this week.

Which did name you and it details RNC Co-Chairman Tommy Hicks Junior's relationship with Donald Trump Junior. The report says that Hicks arranged a meeting between you and the Treasury Department to discuss your views on China. Says it's not clear whether Hicks held investments in any of your China related funds at the time and that the relationship hadn't been probed by ethics officers. I know you talked to our Latasha about that piece said it was a hit piece. I just wanted to give you an opportunity here to clarify. What your role is within the administration with the Treasury and whether there was any conflict there.

I think I think it's absurd. The Treasury reaches out to people in this in the professional community every single day.

I lecture on the Chinese financial system at Stanford and Harvard and Cal Berkeley and they reached out to me asking me about my China about the Chinese financial system.

This was a this was a piece that a political reporter spent many months trying to trying to do something with the RNC co-chairman and they they fired some you know all the meetings and Treasury and found found one. It's really it's a joke.

You are nonetheless bearish still on other trades related to China. I think I'm right in saying you increasingly bearish on Hong Kong given the protests of late.

Yeah I mean look when you look at I look at leverage so if you look at my history of what I've done I found the over levered portions of the US housing market and that's how we began our firm's history. And then we found the let the the excessive leverage in Ireland and Iceland and Greece in Europe then we moved to Japan and then we looked into China and Hong Kong. So there there isn't any particularly regional bias here. There is a bias towards over levered economies. And when you look at China or you look at Hong Kong Hong Kong is the most levered developed economy in the world.

They have 900 percent of GDP in banking assets. That's exactly what happened to Iceland Ireland and Greece when they fell. And you also have 300 percent private sector credit to GDP for example in the US and Japan we only 150 percent. So Hong Kong is the most levered.

Developed country in the world and now they're having this situation where there's an existential crisis like imagine if you were running a business in Hong Kong would you be investing more money in CapEx would you be buying more homes would you like to move more of your family into or out of Hong Kong at this moment in time. You know Hong Kong is going to have a real problem over the next few years and I think I think you're going to see Hong Kong be the epicenter of the relationship between the US and China.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver