Kyle Bass: China Has Been Negotiating In Bad Faith All Along

CNBC’s “Closing Bell” team breaks down how markets are trading with Kyle Bass, founder and chief investment officer of Hayman Capital Management.

negotiating in bad faith

Kyle Bass: China Has Been Negotiating In Bad Faith All Along

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Transcript

It's important to realize that the Chinese have only been at this capital markets thing for the last 15 years. And while they're smart, they're they I equate it to their, they have one of those, like the circus spinning 20 plates, they have to have all plates spinning all at once. And if one of them falls, they all fall. And in this case, what's happening in China is they have to have dollars to sell to buy their own currency. To 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 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 calling them a currency manipulator. They're trying to hold this whole thing together. If they were to if they were to let it go, and allow the all the wealthy Chinese to get their money out and buy more houses them in Vancouver in London in the US and send more their kids to school in the US, you would see there currency collapse, and that's why they keep such a tight lid on it. But in the end, they have 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.

Yeah, well, part of the reason Kyle, you have to believe is retaliation against what they got last week where whether they were surprised, somewhat embarrassed if you want to put it as strongly as that, by the way that that tweet came out. And they were surprised and they were going to do something in return. Do you think there's something to it?

Yeah, I think I think it what's more important is what really happened behind the scenes. So back to back back a month ago, when we were negotiating with the Chinese. We had 160 page document that they had said they were going to sign and the night before they took 50 pages out of the agreement, anything that was measurable and enforceable got taken out. And and they said we'll sign this agreement. And so they negotiated with us in bad faith. And that's why the trucks broke down last time now with Lighthizer and Mnuchin going to be going to China to meet with them. What just happened here is China said, We need you to drop all tariffs on all of our goods when you do to stop disallowing Huawei in the US. And 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. And so somehow, we're the ones that are negotiating in bad faith, or were the ones where the President's tweeting something, and it's all his fault, when the Chinese are the ones that have been negotiating in bad faith all along.

So what happens next in your view, I mean, look, if the Chinese run out of dollars, you have to you have to remember, they need dollars to buy everything that they import, they are desperately short energy. They're desperately short, basic materials are desperately short food, and they have to pay dollars with that they can't pay RMB or Monopoly money with it, they have to actually use real currency. And so if they're 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 their currency. And I think that's what you're seeing some of today. You could say it's retaliation. You think they're losing dollars? I mean, they have trillions of dollars and ammunition. What makes you think that they're having a shortage of dollars? Why not just take their word for it, which is, they're guiding the currency where the market is pressuring the currency because the Chinese economy is slowing, because the administration keeps putting tariffs on it?

Did you just say, Why don't I take Chinese word for it? Pretty funny, but let me get into the next thing. So it's important to think about back to North, but back to sorry, South Korea 1998. They supposedly had the largest pile of FX reserves in Southeast Asia during the Asian security, credit or financial crisis and 9798. And they called treasury secretary summers at the time it 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. 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 converted from being massively us be heavy, to massively USD short, they're selling dollars in the Ford market to try to prop their currency up. And at some point in time, that stops and i and i think that somewhere around now.




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