Shortly before two Evergrande creditors confirmed to Bloomberg (under the guise of anonymity) that the Chinese developer-giant had missed bond payments due Monday, Hayman Capital founder Kyle Bass returned to CNBC for an interview Tuesday morning for a telephone discussion with CNBC's Joe Kernen to discuss the toxic Chinese economy and its unsustainable debt pile.
Bass, one of the most vocal China hawks on Wall Street, has said it's important to understand what, exactly, President Xi is looking for. According to Bass, China is "experiencing similar problems that we are in the US" when it comes to housing prices.
Xi has been managing a broad-based crackdown on the Chinese economy all summer. Now, it's time to confront the issue
Now, China is entering this period of weakness with over $50 trillion worth of credit in their system, with their annual GDP at around $15 trillion.
Compared with China, the US had GDP of $17 trillion with another $12 trillion off-balance-sheet when Lehman collapsed. China is at 3.6x ahead of its "Lehman moment", while the US was only about 1.7x.
What's more, China is still a relative newcomer to the capital markets business, Bass said. China adopted a western-style financial system in 2001 after they joined the WTO.
Around the same time, Beijing's population-control policies started to really bite, as China saw its birth rate dwindle.
There are now 1.3 births per woman in China and you need to be at 2.1 to actually just sustain your population, Bass said. So for many working-age Chinese males, population dynamics are at a critical level and the reason being is the Chinese men can't afford houses so they're all living with their parents and the fact that Evergrande went on a credit binge and built all of the housing and Chinese property took off because their central bank continued to print so much money. Now, it's trying to rein in property prices and he's trying to do it as quickly as possible because China's on an unsustainable path lower.
"Right now," Bass says, everyone who believes China's going to grow at 6% a year ad infinitum "is just dead wrong," but if we just divorce ourselves from any value judgments about China and think about the the future of the plan of the globe - if we always think about the Chinese consumer and we all at one point wanted to move forward in a symbiotic way where we sell things to China, and their consumers buy things from us.
It's nice to think about, but this unfortunately just isn't how China works. Investors must realize that they're not investing "in a real market."
Bass added: "You still have an economy with a closed capital account they have one-way capital flows dollars in. Now, imagine if dollars start heading out."
Watch most of the interview below: