Kyle Bass Is Dead Wrong About Chinese Banks Says Chinese Bank

Tyler Durden's picture

China is upset with “speculators.”

You see it’s not that China’s economy is “landing hard” and it’s not that a massive yuan devaluation is almost a foregone conclusion. No, it’s that “manipulators,” “speculators,” financial “predators,” and all sorts of other nefarious foreign meddlers are colluding to destabilize the country’s economy and financial markets for personal gain.

If it were up to the Beijing, this gang of evildoers would be rounded up and jailed until they agreed to confess their “crimes” on live television. Either that or they'd simply disappear into the bowels of the Politburo. Unfortunately for Beijing, the Chinese can’t arrest George Soros (who one Chinese media outlet recently called a “crocodile” for daring to place a bet against the yuan) and they can’t arrest Kyle Bass either.

As regular readers are no doubt aware, Bass is betting on a meltdown in China’s mammoth banking sector which he says will need to recapitalized. China, Bass figures, doesn’t have nearly enough in reserves to pay for a banking sector bailout and will thus need to do QE on a massive scale to plug the holes. That, he says, will eventually lead the currency to fall 30-40%.

China has fired back at Bass and at Soros over the past several weeks via a series of hilariously absurd “Op-Eds”, the latest of which (out this morning) is entitled “Groundless, unfair to blame China for hardship.” “Pessimists misunderstand the Chinese economy, or they just choose to turn a blind eye to the bright spots that really matter," it reads.

Right. You want to focus on “the bright spots that really matter” instead of depressing things that really don’t matter, like collapsing exports or the fact that the banking sector may be sitting on $3.5 trillion in souring loans.

Thankfully, there’s at least one source who is willing to take a glass half full approach to assessing the situation and that person is Mao Junhua, who you know isn’t biased when it comes to analyzing Chinese banks because he works for - CICC, a Chinese bank.

China’s bad-loan problems are ‘not as serious as’ Hayman Capital Management’s Kyle Bass claimed earlier this month,Bloomberg writes, citing a report by Mao. “10 trillion yuan ($1.5 trillion) is the most that banks could lose from soured credit in an economic hard-landing scenario [and] that’s less than half the $3.5 trillion potential loss flagged by Bass.”

Obviously Mao’s figure is wildly optimistic. If he’s right, it would mean that in a worst case scenario, NPLs would only rise to 5%. If we’re being honest, they’re probably already above 10% and it’s getting worse all the time as evidenced by the growing number of bankruptcies we’ve seen over the past nine or so months.

In fact, even the headline number (which is even less reliable than an NBS GDP print) is on the rise.

“Soured loans at Chinese commercial banks rose to the highest level since June 2006 as the nation’s economic expansion slowed to the weakest pace in a quarter century,” Bloomberg reported earlier today.

NPLs rose 51% from a year ago, hitting CNY1.27 trillion yuan ($196 billion) by December. That's the highest level since Q3 2006. “The bad-loan ratio climbed to 1.67 percent from 1.25 percent, while the industry’s bad-loan coverage ratio, a measure of its ability to absorb potential losses from soured credit, weakened to 181 percent from more than 200 percent a year earlier,” Bloomberg continues.

"NPLs increased by 88.1 billion yuan over the last three months of the year," Reuters adds. "Special mention loans, referring to debts that could potentially turn sour, rose to 2.89 trillion yuan, the regulator said, an increase of 80 billion yuan from the end of September."

And while special mention loans gives us a bit more clarity on what the "real situation" (to quote the NBS) is, there's no way of knowing how many loans have been rolled and thus not counted as souring and perhaps more importantly, there's no way of knowing just what the figure would look like if it included bad channel loans that are carried as "investments" on banks' books.

But before you go following Bass and Soros over to the dark side where "speculators" conspire and plot to bring down the Chinese economy and destroy the country's financial markets, consider the following message from Xinhua: 

“It is groundless and unfair to blame China for the global slowdown and market volatility, and naysayers' misjudgments highlight their ignorance on the world's second-largest economy."

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nuubee's picture

The chinese politicians are just upset that they can't bring the speculators to heel like the Fed does. But, give it time, I'm sure the Fed will lose control soon as well.

InjectTheVenom's picture

>>>>  I believe Kyle Bass

>>>>  I believe the Chinese bank official

ilion's picture

For a retail investor, is it possible to go short China just by buying USD against CNY from brokers like IB, Oanda, Vipro Markets, IG Markets, or are there any other instruments to do that?

fx's picture

"Unfortunately for Beijing, the Chinese can’t arrest George Soros..." I wholeheartedly agree. That's very unfortunate, indeed!

fx's picture

"there's no way of knowing how many loans have been rolled and thus not counted as souring" - Gee, that sounds like a pretty accurate description of the banking system in Europe. And likely that of the U.S., too.

I do hope for Kyle, he hasn't gone long the euro or the dollar versus the yuan...

El Oregonian's picture

"Kyle Bass Is Dead Wrong About Chinese Banks"

Watch your 6 Kyle, it is never good when the banksters say that you are that wrong...

mototard's picture

Watch out for the man with the nail gun....

Durrmockracy's picture

From what I've read, Kyle is a shootist himself...

onewayticket2's picture

Kyle and Sam Alito should get food tasters....

Tinky's picture

...and when they use the phrase "dead wrong"...

Big Beta Bill's picture

If their population is the worlds largest why can't they have the worlds largest economy.  

  1. Largest amount of NPL
  2. Largest automoblie market
  3. Largest consumer market (coming 2018-2030)
  4. Largest foreign reserves
  5. Consumers with no personal debt
  6. Saleable assets

Some characteristics come with the teritory.  

besnook's picture

no,no,no, china is collapsing. keep up with your kool aid ration.

Big Beta Bill's picture

Y'all drink the koolaid of this website as if it's gospel.  

besnook's picture

it's fight club. sometimes it's difficult to tell.

Big Beta Bill's picture

Let us make some soap and wash our minds clean of these biases.  When we've cleared our head let's think about what China will look like in 2020.  

besnook's picture

it's pretty simple as you have pointed out and history has shown over and over. china has huge capacity of people who need to be brought into the 21st century. china has a lot of room to grow unlike their western counterparts. they have linked all the economies from the pacific to iran and soon to the med, and all the way to berlin. the old orient express is thriving(or was, sanctions?). the future is clear. it subordinates the west. this changing of the guard is what all this present geopolitical urgency is all about, a sort of, custer's last stand. it's really sad. it could have been a lot different, still could be, but the west has to save itself before it can be salvaged from it's current fate.

falak pema's picture

China plays catch up wearing the Walmart and Apple shirts...

some split personality disorder!

Now sitting on the Titanic with their string pullers of Pax Americana...

Chuckster's picture

Kyle Bass don't have a perfect record but I would believe George Soros.

ebworthen's picture

Everything is fine I'm sure. 

Those concrete ghost towns will soon be bustling with middle class Chinese buying iPhone's and Buicks using Ali-pay while taking out apartment equity loans.

ThroxxOfVron's picture

<--- Trawling with Kyle Bass.

<--- Trolling Kyle Bass.

SoDamnMad's picture

Hire the team that wacked Scalia to do in Bass, Soros and all others who advertise going short on the Yawn.

SoDamnMad's picture

You didn't mis the "dead wrong" part, did you?

Babaloo's picture

They don't have the world's largest economy.  Not even close, unless you use some bullshit adjustment like purchasing power parity.  And, as their currency weakens, like Bass is predicting, their GDP will decline.

Consuelo's picture

So then...

 

Just who does have the world's largest economy, and perhaps more importantly, how do they maintain that #1 position...?

 

Perhaps by using 'bullshit' adjustments of their own...?

 

'Bullshit', indeed...

 

 

americhinaman's picture

China has the largest real economy by far, and the US has the largest dollar economy by far.  

It is a perfectly reasonable way to view things in real (i.e. PPP) terms.  Most of us come from countries which look better in dollar terms, so we are taught to think dollar GDP is the most important.  Measured in amount of food consumed, cars bought, goods bought, services paid for and rendered, materials processed, etc. China is the largest economy by a very large measure.  Whether or not CNY weakens, their real economy will still be the largest by far, for quite a while.

US is a "bigger" economy in the sense that the price for everything in the US is more expensive.  Say you have a $6 meal at McDonalds vs. a $2 meal at a Chinese local restaurant (anywhere outside of central tier-1 cities).  Is the McMeal in Kansas really worth 3x the home-cooked multi-course meal in Shanxi?  Only in dollar GDP terms.

Latitude25's picture

All the Chinese have to do is maintain social stability HOWEVER it can be done.  They hold the gold and FX reserves.  They have the factories. They have central planners who can turn on a dime and have done so in the past.  For these reasons the outcome is uncertain.  Bass and Soros might be right though.   I have a big tub of popcorn.

i_call_you_my_base's picture

Arguing whether their NPLs are either $1.5trln or $3.5trln. Good luck in either case.

starman's picture

China's gonna need a bigger wall! 

Subliminal messenger's picture

Kyle Bass is as wrong about this as he was about subprime.

falak pema's picture

subprime was home turf which he understood then; China is foreign turf where the culture and power levers are different.

He is taking a big financial risk and making it clearly a POLITICAL game by DARING them to prove him wrong; which China will never accept.

In the US no government could manipulate the market BEFORE Lehman moment as the private banks had a free hand. Lehman ended that and the FED took over the game; aka it became CB controlled on QE drugs.

Since the CB take over of ALL economies of the world post 2008, the HF maverick players born in Greenspanian hubris of "cutting edge technology" having LED to the Reaganista dream going kaput are now on the DEFENSIVE.

Its the greedy shadow banking industry that killed the US finance system via OTC CDO and CDS plays. Now they have less say.

Kyle understood best the world before Lehman or what led to it. He understands less CB controlled plays since QE began and even less China retrenching...he is now in a political game where numbers don't MEAN anything. Until it breaks.

Panic Mode's picture

It's going to be ugly either way.

Consuelo's picture

 

 

"No, it’s that “manipulators,” “speculators,” financial “predators,” and all sorts of other nefarious foreign meddlers are colluding to destabilize the country’s economy and financial markets for personal gain."

 

From a purely foreign policy perspective (and let's not kid each other, people like Mr. Soros do not operate in a vacuum), would it not be advantageous for the Western banking/finance establishment, to have China in a compromised position - by any means necessary...?

Should we not keep in mind that the U.S. has on its list, both Russia and China in the #1 & #2 slots respectively, as most important 'threats'...?

Spoiler: No one is more aware of this strategey better, than the two aforementioned 'threats' themselves.

mototard's picture

If you live in a cashless soceity, what will the next war look like to you?

http://mackenzieinstitute.com/facing-the-next-war-financial-systems/

youngman's picture

The Chinese had a good run..they had double digit growth for many years..now they are returning to normal..2-3%...so all the fast money and growth are gone...there are only so many dams you can build and bridges....they usually last 50 to 100 years...

Not Goldman Sachs's picture

Oh, I thought great was infinite?

 

s

 

FlacoGee's picture

Whether Bass is correct or not, he has limited funds (and declining).   At one point I believe he had $2B.  With his sub-par performance in the main fund, I believe that AUM has dropped below $2B.   It might even be much lower now.

Best not to go "all in" on a bet against a sovereign with trillions in reserves, non-floating currency, and a billion people... with a measly $1B dollars.

I wish him well with his gamble... 

 

BurningBetty's picture

What China is going to do, when the time is right, is revalue their currency and peg it to gold. Making yuan THE world currency. Gold will skyrocket accordingly obliterating all debt. USD will fall. So the big short that everyone seems to believe is yuan may just be the dollar itself.

FlacoGee's picture

Do you believe in unicorns also?

China has a 1B people it needs to employ and feed. 

Their economy would be destroyed if they linked Yuan to gold.

BurningBetty's picture

All debt can be paid off in an instant. And I mean all world debt. All you need to do is revalue the value of gold. Bind up all bad debt, everything, to gold and silver. Yes, that would put one ounce of gold and silver up in the value of a stratosphere from these levels, but it can be done.

larry david's picture

You and everyone else seems to just take China's word that yes,  they have tons and tons and tons of gold sitting in official government coffers.  Every other number is made up except that one?  Why do people assume it's higher?  For all we know the Chinese gov has sold off gold to prop up the yuan,  or corrupt officials just will end up with it personally and screw over the masses.  I wouldn't bet on a gold backed yuan anytime soon,  although the thought is tempting.  

larry david's picture

From the article Tyler linked

 

China's globally-scrutinized stock market remains anemic following an unprecedented rout last summer. Lax supervision and immature investors were among the main reasons. The economic fundamentals able to sustain a long-term bullish market remain in place.

 

 

It's all "immature" investors' (sellers') fault!  Lol! 

 

Do the mature thing and buy buy buy China! Kyle Bass knows NOTHING! 

Herdee's picture

So,like Kyle says,why are the Chinese authorities so concerned about what a small hedge fund from Texas is doing?Must mean he's right.

FlacoGee's picture

They aren't.   At no time was Bass' name even mentioned in the China articles.

They are refuting the combined force of all hedge funds.

Bass is a zit on the ass of most fund's AUM totals.

His words have value on CNBC and ZeroHedge

As a point of reference:

Bridgewater:  $75B AUM  (Bridgewater is probably up and down on any given day the size of all Hayman's AUM)

3rd Point:  $18B AUM (1 good year would return in profit Hayman's entire AUM)

Pershing:  $12B AUM   (Ackman lost the size of Hayman Capital on VRX)

And where is Bass?

Hayman (Bass): under $2B AUM (and declining)

GeoffreyT's picture

It's not clear why AUM are any indicator of the relative worth of the opinions of fund principals: a fund with $75b AUM is almost guaranteed to deliver index returns at best, because it can't take any alpha-augmenting 'pointed' bets outside of the most liquid stocks in its investible universe... and all those are researched to death.

Think of a big fund (measured by AUM relative to the aggregate daily TO in their investment universe) as being like a supertanker. They are ponderous, slow-moving, and have slow turnover. They do not get their returns from big moves in small 'thematic' positions: they get their alpha (if any - most of them have zero long-term alpha) from tilts relative to index (or relative to 1/N, or relative to a benchmark AA for diversified funds). And by stuff that everyone above a billion gets... getting the inside running on secondaries (rights issues, IPOs, etc), and hammering down their transaction costs.

Basically, the captain of a supertanker has to worry about gigantic seas - and he only has to care about those if he's side-on to them. So long as he's got depth he doesn't give a shit about chop, or even swells as big as ShipSterns or Nazare (Shipsterns is big enough to enable big-wave guys to surf >10km km offshore - with tow-ins, of course: nobody's paddlin' that far; Nazare is a shorebreak that has been clocked at almost 100ft).

By stark contrast, a global-focus $2b fund is like a speedboat: you can get into, and out of, alpha-augmenting positions without moving the bid (offer, for shorts) too much. ShipSterns will break you in half, but Crow Bombie or TheRight might be manageable so long as you're not under the slab... but those conditions are ideal for a brave bigboarder (say, $200m-$500m AUM).

Go all the way down to $100m, $50m and sub-$1m personal funds: there, you're a 'short board' surfer, a bodyboarder and a bodysurfer, respectively. So a $100m fund is hard to manage if you're trying to ride shore-slop (intraday or swing), whereas a privateer with half a bar (oo-er!) can have a ball.

The $2-$10b global-macro guys are the only guys in the big-money space who can change their minds without moving the market too much: the >$10b guys have to take it up the ass if they change their mind and have a position that's large (and illiquid at the wrong time) relative to the market. So the >$10b guys need a longer view, and the Kyle Bass types get to think about shit that will unfold on timeframes that the supertanker's skipper can't respond to.

 

Why no 'Jaws', 'Pipeline', 'Mavericks' or other well-marketed breaks that inspires people to buy 'No Fear' t-shirts and a 6' triple-fin thruster? Simples... those are all surfable by 'normal' big-wave guys, whereas Crow Bombie and TheRight (and Cyclops, and Dungeons) are for the suicidal loner: at TheRight, the slab is often >10ft thick by itself. Shipsterns and Nazare are for people who are genuinely unhinged - Eddie would not go.

Bull Bear Nice Pair's picture

Bass convenietly ignores that China has $21 trillion domestic deposits. Even $3.5 trillion loss probably won't be really catastrophic.

FlacoGee's picture

Bass ignores a lot of stuff.

No one ever challenges his bullshit in the media though.

His performance speaks for itself.

Unfortunately, very few people have actually bothered to look at his fund's performance.

pitz's picture

The problem with Kyle Bass's theory is that, when the same occurred in the USA, the result was massive deflation and upwards valuation in the USD$ as domestic  entities raced to cover their short positions on the USD$.  Why won't the same occur in China?  If anything, the Yuan could surge to dizzying heights on account of demand to pay down Yuan-denominated debt.  Devaluation, just as in the USA, is probably an elusive goal.  And a lot more difficult to accomplish in the Chinese context on account of China being a chronic net exporter.