Kyle Bass, Hayman Capital Management founder and chief investment officer, discusses China’s currency policy. He speaks with Bloomberg’s Scarlet Fu and Caroline Hyde on “Bloomberg Markets: The Close.” (Source: Bloomberg)
Kyle Bass Says China Is ‘Just a Paper Tiger’
Q4 hedge fund letters, conference, scoops etc
Transcript
You are a noted China bear. You mentioned in November increasing your short position against the Chinese yuan. Since then we've seen the Chinese yuan strengthen. Why would Beijing let the yen weaken fall and risk incurring the presidents wrath. Right. As the Chinese government is negotiating with the West on some kind of deal.
Well look as you know China purports to be the fifth the second largest economy in the world with 15 percent share of global GDP. But if you look at cross-border currency settlement according to swift less than 1 percent of the world's Settle's and Chinese currency. So Chinese is really just a paper tiger or China is just a paper tiger. And I think that they have they have done so much work in order to prop though Yuan up or the RMB up. The funny thing is is that as we consider calling them a currency manipulator on the weak side in reality what they've been doing is is intervening to strengthen their currency to hold their whole credit market together. So to your point how many how what is their true pile of FX reserves worth worth. How much money do they have in order to defend their currency before they have to let it go. And I think as China becomes more globalized and wants to become more of a real currency today it's not even a real currency being less than 1 percent of global settlement then true economic forces will act on it and that's when now you'll see a revaluation.
What would be that tipping point when do you think that time will come to bear.
You know last year was the first year that China had a current account deficit i.e. more money going out of China than coming in. And I think that is so desperately short dollars that they need foreign direct investment portfolio investment to hold everything together. Given the extent of their of their credit position that they're in today that the tipping point will be when you look at China from a macro perspective they've got a current account deficit and they're running a massive fiscal deficit. So they're consolidated fiscal deficit is a little bit north of 10 percent of GDP including local government finance vehicles. Think about the U.S. We're now a little bit more than 4 percent of GDP and all the alarm bells are going off when China is at 10 percent of GDP. So China's starting to look like a traditional EMI problem meaning they're borrowing or they borrowed a trillion dollars in the global capital markets. Chinese corporates have Chinese banking system is more levered than any banking system has ever been in the world and they're now running a current account deficit. So now there are twin deficit country with reserves that are dwindling. And so when you ask when is the time. The I guess the answer is no one knows but it sure is worsening as we speak.
Well speaking of debt problems there's a Bloomberg report Caroline about two large Chinese far as China Mingqiang investment and wind time that missed a payment deadlines this month which just goes to the whole point of how the over leverage is a problem in the Chinese corporate sector and the concerning thing here is that these are two highly indebted Big Ball Earley's out there cultural perspective here.
How many defaults. We like you'd start seeing what sort of default cycle we are anticipating coming from China and who does.
Well my view is that China works in two worlds. One they work in their domestic world where it's already denominated and in their domestic world they control the price level they control the police the printing press and the narrative. China can really much control their domestic market almost ad infinitum but where you start to see defaults are when they borrow in dollars because they can't manufacture dollars. And so you're going to start to see them defaulting on dollar denominated debts over time and so when you look at the number of corporate defaults and especially corporate defaults defaults and dollars that's where they're going to have a problem if it's if it's an R and B they can sweep it under the rug and pornography. You look at how much or how many RMB they printed since they're essentially the WTO or more importantly since 2009 realized they printed 30 million dollars worth of army if you look at the Chinese money supply. They've printed like it's the national pastime. They've they've embarrassed the U.S. Japan and Europe on the printing side. And so I think that's all going to come home to roost soon.
