Kyle Bass: a long-term China bear

published 21 July 2017

Kyle Bass, founder and principal investor of hedge fund Hayman Capital Management, is a long-term bear on China. Chinese banks have been "systematically reckless", building up vast amounts of debt. Now they are trying to boost their deposits, but they are "running to stand still" while domestic bank deposits grew by $3trn over the past year, debt rose by $6.5trn. Those who think that Beijing can handle this painlessly have been taken in by the "supposed omnipotence of the Chinese Communist Party".

If Chinese bank debt represents a "smouldering fire", Donald Trump's administration could see it turn into a full-blown conflagration. All of the US president's main advisers "have been saying that China has been getting the best of the US". As a result, Bass expects America to impose tariffs, perhaps "as high as 45%". If this happens, "then China has a plan for response", which could eventually turn into a physical battle, possibly in the South China Sea. History shows that "all military conflicts are rooted in economics".

China is between a "rock and a hard place", as its dreams of the yuan becoming the world's reserve currency conflict with what needs to be done to resolve the current crisis. Beijing is already heavily restricting capital outflows, yet if the government is forced to recapitalise China's banking system, the yuan will plummet. As a result, Bass is currently short the Chinese currency, and he believes that any Chinese recession will prompt a "race to the bottom" in Asia. It will also have major global implications around 100 countries "have China as their largest single trading partner".