With countries around the world in quarantine or lockdown mode to deal with the Wuhan coronavirus or CCP virus pandemic, what can we expect in terms of economic fallout?
What evidence has emerged showing the Chinese Communist Party is culpable?
What will happen to the US, Chinese, and Hong Kong economies as the pandemic wanes?
And why is Hong Kong’s situation particularly perilous?
In this episode, we sit down with Kyle Bass, the founder and chief investment officer of Hayman Capital Management, a Dallas-based hedge fund. Bass is a founding member of the Committee on the Present Danger: China, and he is also Chairman of the Board of The Rule of Law Foundation.
This is American Thought Leaders 🇺🇸, and I’m Jan Jekielek.
This interview has been edited for clarity and brevity... emphasis ours.
Jan Jekielek: Kyle Bass, such a pleasure to have you back on American Thought Leaders.
Kyle Bass: Thank you. Great to be here, Jan.
Mr. Jekielek: Kyle, you’ve been this fierce speaker on the Chinese Communist Party’s culpability behind this virus. We’re going to talk about all sorts of economy-related stuff because this is your wheelhouse and everyone wants to hear.
Mr. Bass: I just think it’s important for the press to really think about, and for the world to think about what really happened in a timeline, and not some conspiracy theory because China won’t allow us in, and won’t allow our scientists to try to find patient zero and origin of the virus. And in fact, you’ve probably seen recent communiques between the Chinese Communist Party and their labs that their lab output has to be censored by the CCP, or that has anything to do with the Wuhan virus, [has to be approved] before it goes to the rest of the world. So, they are very sensitive on this topic—number one.
And number two, if you look back to the timeline, and you understand what happened, China has an enormous culpability. They actually have a legal liability, and one that’s a financial liability. I don’t know if you’ve seen various interviews in the last few days of U.S. legislators but there is a growing tide, of not only resentment, but a growing tide of people in the legislative branch of the U.S. and the UK governments, and now it’s bleeding into Australia and Canada, where they’re starting to say that we need to use the rule of law, the U.S. rule of law, the British Common Law, to start talking about reparations and getting the Chinese government to pay for their malign actions. And I think it’s important to note: on December 31, there were already 104 cases and 19 deaths in Wuhan. The Wuhan scientists, the heroes who first found this strange new pneumonia that was propagating itself so freely in Wuhan, not only were they arrested, and punished, and forced to retract statements that they had put on WeChat, but as you know, since then, one of the doctors who was 33 years old has died from the Wuhan virus.
Secondarily, that all happened in December. So by December 31, the government of Taiwan sent a white paper to the World Health Organization explaining that they had full evidence that there was human-to-human transmission, and that it was going to be a new global pandemic. And if you remember, on January 14, Tedros said to the world in a proclamation on a Tweet that this is not a global pandemic, and that he had just consulted with Xi Jinping and the Chinese, and that there is no evidence of human-to-human transmission—this is January 14. And then January 23, Xi Jinping closed down all air traffic from Wuhan to the rest of China. But he allowed Wuhan air traffic to travel to the rest of the world. Essentially, Xi Jinping knowingly infected the rest of the world. … “If he’s going to go down, the world is going to go down with him,” essentially what he was saying. That is not a responsible actor. That is not a government who’s ideologically aligned with the rest of the West. This is a government that basically covered up the truth. And we all know that they covered up the truth, but now, it’s actually after Neil Ferguson’s Boston Globe article, and now you see that the Chinese Foreign Ministry said on February 2 that it is xenophobic to close anyone’s borders to the Chinese, and that travel restriction shouldn’t be made. Xi Jinping himself shut down Wuhan, January 23; this is February 2, they’re telling the world this.
They are the most lying, coercive, manipulative government in the world, and you and I both know, they are committing the largest crimes against humanity prior to this outbreak of the sinister virus that God knows where it really came from—somewhere between the Wuhan wet market, the Chinese Center for Disease Control, which is right across the street, or maybe 20 miles north, at the Biosafety Level 4 lab in China. But the bottom line is, this disease has been unleashed on the rest of the world, and it was knowingly done so. And that’s why I’m so visibly upset about this.
And I think that you probably saw the Jackson Foundation in the UK, the Harvard professors in the U.S., are starting to set forth a legal framework for which international laws (that) China has broken, and the fact that there is a financial liability. As you remember, Chinese [SMEs] (small-medium enterprises) have businesses, and properties, and stock issued in all the various markets in the West. There is a way that we can go after them and grab their assets. And [Mitch McConnell] this morning in an interview on Maria Bartiromo’s show said that China also owns a trillion dollars of U.S. Treasury bills, and those are just book entry bills. We could actually grab and basically forgive that debt—basically cancel that debt. There are plenty of things the government can do here to make China pay for its actions. And the beauty of all that, Jan, is one thing we’ll never be able to do: the West will never stoop to China’s lows. We will never out-lie, we will never out-cheat, will never out-steal, the Chinese Communist Party—they’re the “best” in the world. But what we can do is we can use the foundational bedrock of our countries, the rule of law, and we can exercise and enforce our laws on them for their malfeasance. And that is the play, that is how we level the playing field, against such a tyrannical lying actor.
Mr. Jekielek: I was aware of all these facts, but the culpability is so obvious, right? It’s almost like it takes an extra level of crazy spin-doctoring to try to say, “No, China is the hero. The Chinese Communist Party took care of everything incredibly well, and now, world, you should probably thank us for that.”
Mr. Bass: I think Xi is overplaying his hand because seeing something like that and seeing something like what (Lijian) Zhao said that it was the U.S. military that brought it to Wuhan, their counterclaims are so outrageous that it makes them look stupid, and I think you have this scenario today where there are really four wars we could be fighting with China, and we’re fighting three of the four. There is the information/ narrative war that they’re active every single day fighting with us and the rest of the West. There is the cyber war, which they’ve been fighting for the last 20 years, and they fight it every single day—they’re on offense in the cyber war mostly. Then there’s the economic war. And then there’s the kinetic war. We’re fighting three or four wars with China as we speak, and one could say that the new battlefield, let’s say the battlefield of the 21st century, isn’t going to be with planes, and tanks, and boats. It’s going to be on the economic front, on the cyber front, on the narrative front.
There are 70-plus official Chinese blue-check accounts on Twitter, and they are either ambassadors or official ministry spokespeople for China. Twitter is banned in China; why do we let them on there? Why don’t we put a red propaganda diagonal sticker across every single thing they say? It is absolutely insane that we allow official Chinese accounts on Twitter without labeling them as propaganda, just like the Global Times, and Xinhua, and [inaudible], and all of these different Chinese propaganda outlets that disguise themselves as media. Again, there’s so many things that we need to do that are really easy to do.
Mr. Jekielek: If there is possibly a silver lining to this whole crazy situation, the suffering inflicted upon the world, … you and I both know this realization has been a long time coming. These aren’t new activities, as you’ve said.
Mr. Bass: Yes, the misery that China has brought to the rest of the world with this virus has really been shining a disinfecting light on global supply chains reliance. Think about this: we have Western democracies relying almost completely on a supply chain in a totalitarian, communistic nation. It’s actually insane when you lay it out like that, right? We could go back to our corporate boards and say, “Did you really do this? Because maybe you really weren’t thinking about the different potential avenues for supply chain connectivity.”
But to your point, there is a silver lining, because number one … you and I know Rosemary Gibson. Rosemary Gibson wrote the book in 2018 about the U.S. over reliance on China for prescription drugs and even OTC, over-the-counter drugs, where they manufacture 90% of the active pharmaceutical ingredients for all U.S. antibiotics. It’s actually crazy that we’ve let this happen. We’ve been with a really good [inaudible] from, let’s say, a microchip perspective, and from the perspective of strategic rivalry in very key technological areas, but we completely missed the drug—a national security problem. Well, the good news is, Jan, we’re not going to miss it anymore. We got this. We are going to legislate drug production here in the United States, so that no communistic sovereign actor can decide whether or not our military gets drugs to the hospital, or not—or population. Think about this: we get 100% of our blood pressure medicine from China. 100%. There are 700,000 people in the United States who take blood pressure medicine every single day. We have a 13-day supply. This is insane. This has to change. That’s the silver lining as these kinds of things will change.
Mr. Jekielek: Talk about leverage on the side of the Chinese Communist Party with just this one thing: the blood pressure medicine. It’s astounding. Tell me a little bit about what you’re seeing with respect to the economic situation globally. I’m looking at a headline right now in which the IMF says that the great lockdown is going to be worse than the global financial crisis.
Mr. Bass: I would name it the “sinister Wuhan virus lock-down”, right? The supernational institutions have all been infiltrated by the Chinese government, and so they call it “COVID-19”, you’re calling it the “coronavirus”—it’s the “Wuhan virus.” That is exactly where it came from. It’s how virus nomenclatures worked for hundreds of years; we should stay with that. And it’s not “racist” to call it something that it is. And so, I think from the perspective of the IMF and the economy, the U.S. alone has already lost 16 million jobs. … We think there’s been 4-5 million new (unemployment) filings last week. So we have 20 million jobs that have been lost today. That 16% unemployment in the US alone. And so, as you know, the better part of 3 billion people are under quarantine, homestays, today, and the global economy is off. And so, when you turn a $23 trillion economy like the U.S. off for between 60-90 days, you’re talking about a $6 trillion hole. We’re going to have to run a 15% or 16% fiscal deficit this year, at the very least. I actually think it will be bigger than that. Next year, it’s going to be north of 10%. During the global financial crisis, we never got wider than a 10% of the GDP fiscal deficit. So, the IMF is right in its numbers. The question is, can we bounce back quickly once we have a vaccine and treatment, and relax our social distancing? I think it’s going to be a little bit more difficult than markets imply at this moment in time.
Mr. Jekielek: I’m sure all your investors are running to asking questions about this: What is this going to look like? What does recovery look like? Is it V-shape? Is it U-shape? How fast are we going to actually be able to bounce back? Do you have any sense of this at this point?
Mr. Bass: It’s my view and our firm’s view that it’s going to be a W. It’s not going to be a U or V, or an L. I think that with people holed up in their apartments, their homes, and not able to work from their place of business, and the restaurants are closed, and the whole service economy’s off. When things start to become loosened, and people get out and start to get back to work, the animal spirits are going to be conjured in a positive way; not in the negative way that this began. But I think we’re going to see a lot of enthusiasm, a lot of optimism, because as Americans, we get out of bed every day and we’re very optimistic, and we have the best intellectual property in the world, the best educational institutions in the world. And so, I think we’re going to hit the ground running pretty hard.
I’m fearful—and I’m very dangerous because all I’ve read (are) a few white papers on the subject; I’m not a virologist by any stretch of the imagination—but it sure looks to me, we have 70 vaccines that are currently under research and review. And at some point in time, I believe that the world, given its intense focus on the subject, is going to develop a vaccine for this hideous Wuhan virus. But I think that’s probably going to take until the end of the year, Jan. So, I don’t know how international travel bounces back because I can tell you, I won’t get on an airplane until there’s no virus, right? I will never cross the pond again, until there’s a vaccine. And so, I don’t think you’re going to see the same level of business activity right away. And so, I say a W because I think we’re going to have an initial spurt, and then the question is when flu season comes back this fall, does it show itself again?
As we’ve seen in Singapore and Hong Kong, we’re having reinfection. And we’re actually having reinfections of those that are believed to have developed an antibody—[people] that have already recovered from the virus. And so, this is going to be a bit of a slog. And I think a W shape recovery is what we’re looking at. And I think, hopefully, Melinda Gates gave an interview a couple of days ago where she said, … “We think we’ll have a vaccine in the next 18 months.” If it’s 18 months from now, it’s a real problem, Jan. If we don’t get people back to work in the next 45-60 days, we’re going to have damage that’s irreparable, and we’re going to have a much longer lasting damage, and it will also damage the psyche of all the participants. If you remember, there was a profound change in the proclivities of those that suffered the Great Depression. … You probably heard from your father, and your father’s father, about an aversion to debt because it wiped people out back then. And not only did it affect that generation, the 1920s, 1930s, 1940s, but it also affected the baby boomers that were born to that generation, right? And so, there were two entire generations whose actions were influenced by one very specific, horrible financial event. And I believe this will be somewhat of a similar event from the perspective of how people operate their lives going forward. It will not go back to where it was.
Mr. Jekielek: Kyle, we just recently had a mental health expert, psychiatrist, pharmacologist, talk about the effect of this lockdown on suicide rates and a whole range of”side effects”. They’re not really “side” because they’re a direct result of what’s actually happening. I couldn’t help but remember this Tweet that you put out recently saying that perhaps there’s been a “delay in reporting” in the Chinese numbers. Well, it looks like there has been a “delay in reporting” the Tiananmen Square numbers, to that point. So, I’m guessing you don’t really believe the Chinese numbers. What are the implications of this?
Mr. Bass: I’d be willing to bet you, Jan, if you did a 100,000-person survey in the United States, every socio-economic group, and you ask them, “Do you believe the Chinese government numbers?” I would be willing to bet you today that would be an 85% super majority, “No.” … From the origin of the virus and 1.4 billion people, not one of them passed away from the virus when it’s on every continent, and we have millions of cases all over the world? And they say, “No official deaths today,” and I thought back, “Well, they haven’t ever officially reported any deaths from the Tiananmen Square incident, so maybe there’s just a ‘lag in reporting’.” It was a little tongue in cheek saying, “Why should we ever believe the Chinese government?” They just lied to the world in January, and they covered everything up, and now the world is where it is today, and somehow they want us to think that Huawei is the savior because Huawei is delivering masks to hospitals in New York City and Washington, DC. That’s it. Their soft diplomacy—”soft” because they’re delivering masks—it’s so clear what their motives are, and what they’re trying to do and take advantage of a situation that they created themselves. And it’s just ugly. And I think that even Joe Sixpack in the United States, even the guy that grabs a six pack of beer and goes to a NASCAR race, understands that the Chinese government is not trustworthy, they’re not our friends, and one could deem them to be our mortal enemy. And at some point in time, I think Wall Street’s view is going to have to change. And I think it’s happening now.
Mr. Jekielek: We were talking about the pharmaceutical industry sourcing just about everything from China. And I’m thinking about the Buy American executive order. It seems like a no brainer to repatriate critical medicine production. Why is this being stalled or slowed down?
Mr. Bass: I’m sure you’ve heard that the Chinese Communist Party decided that anyone that’s to move their supply chains out of China needs a permit to leave. I don’t know if you’ve heard that in the last couple of weeks. But for the last three years, really since the fourth quarter of 2016, when the Chinese completely closed off any kind of external foreign direct investment by rank and file Chinese and even the government—if you remember when they closed the door when they were having a serious currency devaluation problem—companies that do business in China, whether you’re Intel, or Sony, or BMW, or Chevron, those companies haven’t been able to get their dollars out of China, their dollar profits, since the fourth quarter of 2016. I know several of them have hired friends of mine that are former bureaucrats in U.S. administration who have relationships with Wang Qishan, with Xi, with his party, trying to get the money out. They haven’t been able to get the money out for four years, Jan, and now we’re being told that maybe you can’t get your supply chains out.
Shinzo Abe of Japan, as you probably saw, set forward a program of US$2.25 billion to pay the actual moving costs of the Japanese companies that want to move their supply chains back to Japan, from China. And you probably heard, even Larry Kudlow (Director of the United States National Economic Council) said, “We think that’s a great idea and we should do that.” I am all for setting aside and legislating a pool of capital to help our institutions leave China. And I think that’s, again, a moral imperative—I think we should be out of there. All of the cheap tennis shoes, and T-shirts, and trinkets we buy from China is nowhere near the amount of money that they steal from us every year in intellectual property. People say, “Well, if we just disengage with China, it’s going to cost us 2-2.5% of GDP. To that I say, “They steal 2% of GDP from us every year in intellectual property, and they earn a return on that. It’s actually a better deal for us to just stop. I know that sounds hyperbolic, but it’s just a fact.
Mr. Jekielek: You’ve been a big advocate of decoupling—bringing the economy out of China. Has anything changed with respect to that view, or the approach, since all this new information we have?
Mr. Bass: I think the silver lining of this horrible virus is that it’s going to accelerate this decoupling. We’re going to have forced decoupling from a national strategic perspective, let’s say, from our government, and I think there’ll be forced decoupling from many other Western governments. And then you’re also going to see corporate boards … forced to rethink their whole supply chain immediately. So, this is no longer, “Well, we’ll think about it next year, or maybe in our three- or five- year plan. We’ll think about how to maybe open our next factory in Vietnam, or Cambodia, or Mexico, or one of the other competitors to the Chinese factory floor.” Now, it’s forcing everyone to do it right away, and that’s a beautiful thing. So, all this has done is speed up something that had to have been done in the past, (but) people were just dragging their feet.
Mr. Jekielek: Can you foresee a situation where the Chinese Communist Party says, “Sorry, everything that’s in here, we’re keeping it”? They’ve already done that in a few instances—the nationalizing of certain factories and so forth.
Mr. Bass: Yes, I know of a company that I’ll leave unnamed, a very large public company, that has $10 billion in cash on its balance sheet as per its annual filing, and $1.5 billion of that money is in China. They haven’t been able to get it for four years, and I don’t know how they’re ever going to get it out, truthfully. And so, this is what I worry about: our pensions and all of the money that China has figured out how to coerce MSCI and the various index providers, the passive providers, to weigh China so heavily. In the MSCI Asia index, if you include U.S. listed ADRs, they’re now 48% of the index, right? They’re supposedly 15% of global GDP, but less than nine-tenths of 1% of global currency cross border transactions settle in Chinese currency. There is a Potemkin Village here. There is an economy that we give them the credit for because we dollarized it at the current dollar exchange rate... Think about this: They’re supposedly the second largest economy in the world, but they have a closed capital account. They’re not a real country. They are ideologically 100% different than the developed West, and economically, they couldn’t be more closed if you look at their capital account. They only have it open enough to buy the things that they need to buy, that they’re so desperate to buy. They have to buy food, they have to buy energy, they have to buy base materials, and they have to buy base metals. They have to buy those things from the rest of the world and they have to spend dollars. They need blood to fuel the CCP tumor, and that blood is dollars. And all they do, their entire MO with Belt and Road, and with cajoling the index players to figure out how to get U.S. dollars into China, because they need those dollars to buy things. No one will accept Chinese monopoly money because no one trusts the government. The beauty of this is once our government really understands this, we hold all the cards—the U.S. government holds all the cards.
Mr. Jekielek: I want to ask you about the realities of the Chinese economy and the Hong Kong economy. Before we go there, there’s been a number of very high-profile U.S.-listed Chinese companies that have basically lost most of their value because of fraud being discovered. What are the implications of that? Is this the beginnings of some kind of a trend?
Mr. Bass: I think it catches people by surprise. If we were to poll the population of the United States and say, “do you think Chinese companies that are listed on the US stock exchanges are subject to the same audits that US companies are?” They would probably say, “yes.” Well, that’s just not the case. They aren’t subject to the same Dodd Frank compliance features as US companies are. We gave China a pass, right? The whole Nixon-Kissinger view of China was to open up to this totalitarian, dictatorial regime, and let’s give them a taste of Western capitalism. Let’s bring wealth into their country in dollar terms, and what that should make them do, is open up and become more democratized, and also ideologically, maybe become more of a responsible “global actor.”
For anyone that’s questioned whether that’s worked out well or not, I think you see that they have gone the other way.
If you listen to Xi Jinping’s speech in the 19th Party Congress, his entire plan was to build a socialist system. They call it socialism with Chinese characteristics or Marxist, Leninist socialism. They want to build a socialist system to basically show the world that that system is better than Western capitalism. He said that in the 19th Party Congress. He is not trying to converge with the West, he’s trying to teach the West a lesson after their hundred years of being humiliated. Post Opium Wars and Hong Kong and Great Britain, one of those wars. I think it’s important to know that they don’t have any intention to westernize and converge. This is not a race for power. This is a simple ideological difference between two completely different cultures and governmental styles. I actually think it’s intractable. I think this relationship is impossible to solve.
So when we get into the financial aspects of this, this is where the Chinese propaganda machine has been so effective. A lot of people don’t know that every single joint venture with a US or European financial firm in China, the chief Asian economist of that JB has to be a member of the Chinese Communist Party. So when you think about the fact that Goldman Sachs Asia chief economist must be a member of the Chinese Communist Party, and Barclays Bank Asia, … or even the Chinese investment banks. Everything that gets written about the Chinese financial system is through the lenses of the perpetrator, right through the lenses of the propagandists that want to convey a message to the rest of the world. We all just …give them the benefit of the doubt. We say, ‘well yeah, they have a $13 trillion economy, and that is 15% of global GDP.” They are the second largest economy in the world, and if you purchasing power parity, many of the economists say, well, “China’s already wealthier the United States.” That is such complete crazy talk, but we just give them that benefit of the doubt of the US dollar exchange rate, which they manipulate on a nightly basis and a daily basis. They prop up their currency every single night in the foreign exchange markets, and their capital account is closed. Less than 1% of global transactions settle in their own currency. This is a house of cards.
If they were to open their capital account, how many wealthy Chinese people do you know, that can’t wait to buy more real estate in China and send their kids to school in China? They all want to send their kids to the west to learn from real schools, and they want to buy property that can’t be taken away from them because we have a rule of law. So their capital account would collapse them, if they opened it up. Their currency would drop 50%-60%. And then think about what their GDP would be. It wouldn’t be 13 trillion, it would be seven or six. Right? And so it’s important to know that again, we give them the benefit of the doubt of having this monstrous economy. It’s big, alright. And they’re influential to a certain extent, but it’s nowhere near as big as they say. Again, they must have dollars to make it work.
Mr. Jekielek: To your point with these Chinese Communist Party members being the top economists for the Asian operation of all these banks, I think this CCP virus disaster has shown how the political survival of the party is always above all other considerations, even human lives. Never mind talking about honest reporting of financial numbers.
Mr. Bass: That’s exactly right. When you look at a Marxist-Leninist socialist system, or socialism with Chinese characteristics, it’s always for the betterment of the party. They will trample human rights and basic rights of individuals in order to get to that goal and they make no mistake about that. And we know what they’re doing to the ethnic Uyghurs in northwest China and Xinjiang. We know what they did in Tibet, and we know what they’ve done to the Falun Gong and the Christians. They religiously persecute anyone that doesn’t hold President Xi, or Secretary Xi, above your God or whatever religion you want to practice. It’s actually crazy what they do. And again, we give them passes. Can you imagine if you explain to someone that you’re doing business with a regime that has more than a million prisoners of conscience locked up and is executing live organ harvesting on this population of political prisoners on a daily basis, and yet [companies] like Blackstone can’t wait to invest another dollar in China. People like Sheldon Adelson can’t wait to open another casino in Macau. You know why? Because they just let money blind them to the blatant human rights abuses of maybe one of the most tyrannical regimes that has ever lived. It’s crazy.
Mr. Jekielek: Kyle, I’m thinking of something that Alan Leung, one of the perennial pro-democracy people in Hong Kong, said. He said in Hong Kong they have a saying, “if we burn, you’ll burn with us”, i.e., if Hong Kong burns, China will burn as well. You recently showed me your Q1 report for Hong Kong, and honestly, my mouth was wide open. I was kind of feeling the fear. What is the reality around Hong Kong that you can talk about economically right now?
Mr. Bass: I think Hong Kong is the crucible. Hong Kong has always tried to exist as its own sovereign entity with its own rights under British common law. Back when Deng Xiaoping was negotiating the handover with Margaret Thatcher in the late 1970s, early 1980s, that discussion of the handover of Hong Kong, back to the Chinese, which was to happen in July of 1997 was being had in secret in the early 1980s. When it got around to Hong Kong and around Southeast Asia, who had been enjoying British common law, and essentially a vacation to British existence with a real respect for autonomy and human rights and everything that Hong Kong was so good at back then, when it got around that China was going to get its grimy mitts on Hong Kong, what happened? The currency actually collapsed. So between 1980-1983, the Hong Kong currency fell 50% value versus both the dollar and the pound. That’s what precipitated the Hong Kong monetary authority to peg the currency to the dollar because there were front page articles saying Hong Kong is a banana republic, and that it will be handed back to the Communist Party, and no one knows what they’re going to do with it.
So that was a crisis that precipitated the peg. 36 years later we are today. But think about this: July 1, 1997 was the handover of Hong Kong back to the Chinese. July 2 1997, the very next day is the day the Thai Baht broke its peg and collapsed 60% That is not coincidental. If you remember the Asian financial crisis happened during the handoff in 1997-98, you had an Asian crisis where all of a sudden they borrowed a lot of dollars, and their currencies collapsed versus the dollar and it blew apart many of those countries. This was the fear of the handoff of Hong Kong back to the Chinese actually happening.
So you had a crisis that precipitated it, which was a discussion of the handoff. The handoff itself caused another crisis. And here we are today where the Sino-British act of joint declaration of 1984 was signed, whereby China agreed to leave Hong Kong in situ, autonomous until at least 2047. That was the plan 1997 to 2047. They agreed to do it for 50 years. Now in 2047, it was just going to become another city in China. But was going to be a 50-year grace period. In 2019, the Chinese government decided that they wanted to put through a very slick extradition policy whereby any crime the Chinese government alleged anyone in Hong Kong committed they could simply grab them an extradite i.e. take all their personal freedoms away in an extrajudicial environment. That is what precipitated the protests, and that bill floated through the Hong Kong Legco (Legislative Council) in February of 2019, and the protests began in earnest June 1.
So you already have a significant uprising of the Hong Kongers. You saw a massive part of their population peacefully protest in the streets of Hong Kong this last summer, and what did you see happen? You saw their economy in the third and fourth quarter of last year drop north of a 10% real rate of GDP. It was clocking at the end of the fourth quarter down more than 15% of GDP. For those of you that aren’t economists, when you’re down 10% real GDP, that is not a recession, that is a depression. They are the most levered economy in the world. Their banks are 850% of their GDP and assets, and so when you think back to the European crisis, you had Iceland, Ireland and Cyprus. Remember how those dominoes fell? They fell in order of the size of the banking system. Those banking systems were enormous and they went unchecked. And so at the very first sign of loss, it detonated the entire sovereign.
What you have happening here, is you have the worst of all situations for Hong Kong. The Hong Kong leadership, Carrie Lam is a failed leader. She is polling at a 14% approval rating. I say this in my office and laugh. I say my door knob could poll at 14%. You could easily get 14% of 100% with anything. So that’s about as low as a political leader can get. She’s finished. She’ll be replaced one day very soon. The police of Hong Kong have lost the trust of the people. The people don’t trust the police. They don’t trust the leadership. The shelves are bare. They’re in a full quarantine, and it’s a failed state. Their GDP before the Wuhan virus was dropping at an annual rate of 15%. They have the most levered banking system in the world, and they’re entering a full depression.
So what you’re going to see is this concept is crucible of “one country two systems” being a complete failure because ideologically those two systems can’t exist together. These are mutually exclusive of one another. Either you have the heavy hand and rule by law, or you have a rule of law that is respected, everyone’s autonomy and personal freedoms are respected, and so are simple property ownerships and rights. That is all going to be taken away. I don’t know if you saw this, but there is this new person I showed you when you and I talked yesterday, who was just put into place. The butcher of Tibet, Luo Huining, is who the Chinese Communist Party decided should run the relationship between the CCP, China, and Hong Kong. Luo Huining doesn’t even speak Cantonese, and he’s in charge of Hong Kong. So what do you think’s going to happen next? So Hong Kong is this fascinating crucible of these two systems that can’t coexist, finally bashing heads together. This isn’t going to magically get better [where] trust is going to be resumed, and we … go back to the Hong Kong that we knew just about a year ago. Think about January of last year, everything was fine. And look at where we are today. By the way, we haven’t seen any of the numbers since the virus lockdown. So you can’t take an economy that’s 850% levered of GDP in the banks and turn it off, which is what’s happening.
Mr. Jekielek: Kyle, I’ve been speaking with a number of friends in Hong Kong about this. People are deeply worried, including US lawmakers. There has been an outpour of support from the west for Hong Kong. But how can Hong Kong even be helped in this situation? It is a big question mark in people’s minds. What can policymakers in the West do to help this? Or is there anything?
Mr. Bass: The die is cast. The pattern is set. They took on entirely too much leverage. Two of the largest banks in Hong Kong are two British banks with essentially no British depositors and their bankruptcy remote subsidiaries in Hong Kong. I think the die is cast. You can’t lever an economy that much. You can’t have real estate values at astronomical prices, and then all of a sudden turn the economy. You know what happens next, everyone knows what happens next. It doesn’t take a genius to know that they are going to have one of the ugliest banking crises that has ever happened to any country anywhere in the world. That is going to happen this year. Even if we come back from the Wuhan virus in the next few months, Hong Kong is already finished.
So if the good people of Hong Kong have fought the good fight, for those that can leave, I think they should leave. I think that you and I both know the Chinese surveillance state is going to be reviewing all the videos of the protests, and they’re just going to summarily incarcerate people and rip their liberties away from them. Hong Kong is just going to become another failed city within China. That is what’s going to happen. And it is going to happen 27 years too early. We know the people that are going to execute it. I know that is a grim view, but I can’t see another way out of this for Hong Kong. There are 85,000 US citizens and 200,000 British citizens that live in Hong Kong. You can bet this summer that they are all going to leave.
Mr. Jekielek: It is a very difficult situation, any which way you slice it. Hong Kong is basically also the conduit through which the foreign direct investment goes into China. So now let’s sort of open up the lens here. Let’s look at the Chinese economy, and what is happening with it. And how are the indexes responding to all this?
Mr. Bass: The index providers just claim that they practice free speech, very much like the ratings agencies did in the US going into the crisis. Post global financial crisis, the ratings agencies got regulated. These index providers in the US, such as the MSCI the FTSE, all these other ones in the West, are unregulated in the US, and they are actually regulated in Europe. Maybe the US should look to Europe for regulatory oversight, because they set the gold standard. They decide where hundreds of billions of dollars get invested, and they’re basically acting as fiduciaries, but they are not taking fiduciary liability. I think these index providers should be in real trouble going forward. I just believe this money will never come back. I believe that, to your point, much of it will get stuck in China and the relationship between the US and China is only going to worsen going forward.
Mr. Jekielek: What is the reality for the Chinese economy as we speak? They are saying it is business as usual, and everyone has gone back to work. Of course, we don’t trust the numbers. We know that, but there’s certainly been some recovery that has happened. Where do things stand?
Mr. Bass: China’s two largest trading partners by far, are the US and Europe. The US and Europe are off. We are closed. We’re at home. Our unemployment rates are skyrocketing in the mid-double digits. Our businesses are shut down. Who is China selling anything to right now is all I want to know. If their economy is fine, and only down a couple percentage points and “nothing to see here.” It is complete BS. Their banking system is 350% of their GDP. They are uber-levered. The leverage in their banks against real estate in tier one and tier two cities in China is enormous. They are going to have a crisis just like we are. The difference between crisis within China versus crisis out of China is that in China, they control everything. How many times have you heard? They are just China. They do what they want.
Internally, they print more RMB than any economy prints money anywhere in the world. They control the printing press, they control the police, they control the narrative, and they control the government. So internally, they can fix things by printing a lot of their money. Again, that makes their money worth a lot less when and if it ever converts to dollars, euros, yen or pounds. I think it’s important to know that they have an enormous amount of leverage. They have a huge fiscal deficit. Their fiscal deficit was almost 14% of GDP before the crisis. They were running a small current account deficit going into the crisis. Now the world is off. The IMF says global GDP is down 3.5% instead of plus 2-3%. That is a major shift in global GDP. If we get back to work, if we reopen our economy in the next 30-45 days, our GDP will end up dropping 10% or 11%. That’s what I think, and that’s what our numbers show us. If we don’t get back to work in the next 45-60 days, our GDP is going to drop a lot more and it’s going to be a real problem. So just imagine that our banks are one times levered to our economy. And off balance sheet if you include Fannie and Freddie, it’s about 1.3 times. China is 3.5 times levered, and Hong Kong is 8.5 times levered. Just think about the negative convexity of those two situations. They have got their hands full. They have 25 spinning plates, and when one plate drops, they’re all gonna drop.
Mr. Jekielek: Tell it to me like I’m five. Why does that create a more combustible situation?
Mr. Bass: You only need to look back at Iceland, Ireland, or Cyprus where let’s say you have had a GDP, for argument’s sake, of 100 billion dollars, and you had a trillion dollars worth of bank loans in your banks. Just imagine. Your GDP is 100 billion. Let’s say you have foreign exchange reserves of 10 billion dollars, and you have a trillion dollars worth of loans in your banks where 5% of the loans go bad or 10% of the loans go bad. God forbid, 10% of your loans go bad when you enter an economic depression. You are going to lose 100 billion dollars. Just think about that. That is your entire economic output. That is 10 times your reserves you’re gonna lose. So that’s why it’s such an enormous problem when you let your banking system grow unchecked, which is what Hong Kong has done.
Mr. Jekielek: Kyle, do you expect to see any change in the investment activity of some of these larger entities like CalPERS, that uses the indices to guide their investment?
Mr. Bass: You are opening an entire new can of worms here by bringing up CalPERS. I’m sure you know, their chief investment officer is actually a member of the Chinese Communist Party. He is the deputy director of China’s currency administrator. You don’t get a top five job in China unless you are part of the party elite. He managed the entire currency reserves for the Chinese Communist Party when he worked at SAFE, and now he somehow has weaseled his way in to be the CIO of the largest pension fund in the United States and he is shoveling dollars to China. That itself needs a full-scale investigation. He has already admitted to being part of the Thousand Talents Program, which I’m sure your viewers know what that is. There are about 70,000 members of the Chinese Communist Party that are instructed to infiltrate other economies and steal all intellectual property methods, business methods, and any kind of secrets and report back to the Communist Party. In fact, they have an award every year for the best theft and they give 750,000-1,000,000 dollars and you get a plaque. Ben Meng, the CIO of CalPERS, is a part of the Thousand Talents Program and a member of the Chinese Communist Party. That begs the question to me: who is your fiduciary responsibility to? In theory, if you are a Communist Party member, there is no one higher than Xi Jinping, even whatever God you want to worship. Yet, if you are the CIO of a massive pension fund, you must have a fiduciary responsibility to the teachers of California. I’m not sure where his loyalties lie. Actually, I’m pretty sure as to where they lie, and therefore that situation itself is crazy. How does that happen in our country? I’m not sure. And we need to change these things.
Mr. Jekielek: What about the different funds like the military thrift fund? These which, presumably, don’t have the same kinds of challenges that you are describing here, but have still made these decisions based on the indices. Have you heard anything about changes of approach?
Mr. Bass: There is a way to fix this. If I was anointed to be, let’s say, the head securities regulator in the United States, I could fix it with a few waves of a wand. It would actually be pretty easy. Number one, I would say any company that wants to list in the United States, forget about if it’s just from China or from anywhere else in the world, you have to adhere to real audits just like US companies do. You have to adhere to the same standards as US-listed companies. Let’s just level the playing field. That’s not being punitive. That’s not being xenophobic. That’s not being anything other than saying everyone’s going to play by the same rules, and everyone is going to live by the same rule of law. If we did that, 95% of Chinese companies couldn’t be listed, or maybe 99%. When I was in Washington DC, meeting with members of the House Financial Services Committee, the Senate Finance Committee, I was told by one particular member of Congress, “You know, who was sitting in your very seat yesterday telling me why Chinese companies don’t need to be adhering to the same standards as US companies?” I said “who?” He said it was the head of the Chinese Securities Regulatory Commission, the CSRC, which is the Chinese version of the FCC. He was lobbying US Congress members sitting in their offices, explaining to them that it’s a national secret that every person and every audit within any Chinese SOE is a state secret, and therefore it cannot be audited, to which this one member of Congress said, “we have Northrop Grumman and Raytheon and defense companies that have huge amounts of secrets that our auditors audit and we don’t see their secrets.” To which the Chinese regulator had nothing to say. That Chinese regulator is also a professor at Stanford.
They have infiltrated every single aspect of our government and our regulatory system. You wonder why their companies don’t have to adhere to the same standards we do? It is unimaginable to me. You could fix that in a nanosecond. Those kinds of things have to happen. You know, when the Chinese invest in our markets? They invest in venture capital or they invest in stocks? Let’s say they invest in Uber and they make $5 billion. You know how much tax they pay on that investment? Zero. Not a penny. They don’t pay a dime of US tax for capital gains, whether it’s short term or long term, it is zero. How many people that watch Epoch Times know that? That is such a simple thing. When Saudi Arabia invests in companies here in the US, and they use our judicial system to adjudicate wrongs that they think were done against them, how much do they pay in tax? Zero. Our system has to change. Those are simple things that we can do to change it.
Mr. Jekielek: Basically, you are talking about evening the playing field for everyone.
Mr. Bass: Why doesn’t everyone play by the same rules and have the same taxes here? If you want the benefit of the US rule of law, the US fee simple property ownership, a great western democracy and send your kids to school here, you are going to pay the same taxes that US people pay. How about that? If you want your companies to be listed here, you’re going to submit to the same regulatory procedures and audits that US companies do. Does that sound hyperbolic or crazy to you? It’s not.
Mr. Jekielek: The theme throughout all of this has been the horror show that comes out of the Chinese Communist Party operating on its own terms in the US and everywhere. The situation that you are describing economically seems to be a threat to the Communist Party. A number of folks that have been on the show have talked about this. I’m wondering about your thoughts. And we’ll finish up with that.
Mr. Bass: The path to “greatness” that Deng Xiaoping set forth, and that every leader post-Deng followed, whether you are Hu Jintao, Jiang Zemin and now Xi, who has not bided his time and kept his head low like Deng said. Xi is playing his hand out loud and he’s actually playing it in a not-so-smart way in these situations where the globe is in a state of dire stress and he’s overplaying his hand. What I have heard from my contacts within China and the people that I talked to on a daily basis, is the whole faction of Deng Xiaoping and this family. It is the Guangdong elite that are already rattling the cages for change. They believe that Secretary Xi has kind of stuck his head up a little too high and overplayed a bad hand, and I think the larger the economic disruption is, and the more unemployment that ends up coming about in China or let’s say, famine and disease and everything that might come from an economic depression, that could easily unseat this “Emperor for life” and I think his days are numbered, if my economic ideology is even close to being right.
Mr. Jekielek: Do you think they might try to use him as a scapegoat?
Mr. Bass: This is like when the military conducts a coup. As we saw in Turkey, a coup has a binary outcome. Either you’re going to win, or you’re going to die or get thrown in jail. So I think this concept of somehow overthrowing Xi is a very dangerous game for those that play it in China, and I think everyone knows that. I am hearing the rumblings already, and we will see if those come to fruition.
Mr. Jekielek: The reason I’m asking is that just because you change the head doesn’t mean the Chinese Communist Party changes. Right?
Mr. Bass: Right. For all intents and purposes, the modern Chinese Communist Party like to call it [inaudible] 1949. My god, look at the death and destruction that has happened since then, with horrible experiments on their population. This concept of socialism with Chinese characteristics being a better system. It is all a facade, and a closed capital account. Their desperate need for dollars will actually show the world that the whole thing is a facade. I think that’s a positive thing over time, because Western democracies are, I think, the best systems for inalienable human rights and the rights of great nations. Think about every big war that has been fought, has been fought for freedom. The people of China have no freedom. I just can’t imagine that these two ideologies can coexist in some sort of peaceful manner. We are already fighting three or four wars with them. Let’s hope it never goes kinetic but it is bad as it is. These propaganda, economic, and cyber wars that we’re fighting with the Chinese are principally as hard as they get. We are fighting on a daily basis and fighting a good fight. The problem is, we’re playing a game against an intolerant opponent with tolerance.
Until we change our ideology and the manner in which we play the game, we are going to be on the wrong end of that stick which we have been for so long. It feels to me like that narrative and our game plan is changing. I think this sinister virus is going to force that change to happen quicker. So it’s a terrible thing for the hundreds of thousands, and I think eventually millions, of people that will lose their lives because someone in China fumbled the virus football in their own end zone. At some point in time, it will actually change the manner in which we interact with such a tyrannical, awful regime.
Mr. Jekielek: Kyle Bass, such a pleasure to have you on again.
Mr. Bass: Jan, it is a pleasure seeing you.