Hayman Capital's Kyle Bass made a brief media appearance today, when he confirmed to Reuters that unlike some other "China tourist bears", he remains staunchly negative on China, saying he is still short the Yuan because problems from China’s credit bubble are "metastasizing."
Speaking to Reuters' Jennifer Aboan, Bass said that “what the public narrative is and what they have been doing behind the scenes are two completely different stories,” and added that “China has been masterful controlling the public narrative. As a fiduciary, I have no idea how anyone can invest in China.”
Discussing his specific trades, Bass said Hayman’s yuan short is a “core” position and has “always been meaningful.” He also identified "fresh" warning signs that China’s credit problems are spreading.
First, Bass pointed to the yield on five-year MTNs, which are trading at 5%, exceeding the bank loan rate, about 4.75%, for the first time. We first highlighted this paradoxical "cross" one month ago when we observed that "rising base funding costs and interbank credit risk concerns have pushed banks' cost of borrowing beyond the rate they charge customers for loans for the first time in history."
Bass then noted last month's downgrade of China by Moody's - the first since 1989 - which however did not have a material impact on China so far, aside from prompting a panicked response by Beijing which actually sent the Yuan surging as the PBOC engaged every trick in the book to prevent Yuan bears from gaining momentum, including the recent change in the Yuan fixing mechanism. Next, he discussed his concerns about China's shadow-banking system and the country's capital controls as "multi-nationals can’t get their money out.”
Indeed, CBRC vice-chairman Cao Yu said China established 12,836 creditor committees by the end of last year, to help manage credit of 14.85 trillion yuan. Bass said this amount represents 20 percent of the loans in Chinese banks, net of mortgages.
Going back to the original "bear" thsis, Bass also said he believes that non-performing loans at Chinese financial institutions are currently approximately 20%, not the 1.7% rate that has been widely reported. “14.85 trillion is more than all of the equity in the entire banking system,” he said. “The Chinese have masterfully swept all of this under the rug.”
Bass also addressed the recent change to China's Yuan fixing mechanism and said Beijing has been looking to force out one-way bearish bets on the yuan with the previously discussed second change this year in how the currency's guidance rate is calculated. "This fixing mechanism throws a bit of unknown into the calculation,” he said.
Still, he said he was not throwing in the towel on his short position. “The PBOC wants you to do that," Bass said. "I don’t know how they can hold this all together. The numbers are telling me that we are right. The numbers are getting so bad so quickly.”
Finally, a couple other things Bass should have thrown in the mix are the recent reemergence of China's "ghost collateral" as a major risk factor, one which as Reuters framed, "lax lending practices and overvalued collateral spurred the U.S. financial crisis in 2008. Now, banks in China face risks of their own as fraudulent borrowers and corrupt bankers burden the financial system with loans lacking genuine collateral." There is also the recent, rapid rise in interest rates which as explained last night, has led to a record plunge in net corporate bond financing, as companies find it increasingly difficult to issue new and rollover existing debt, especially that maturing in under one year.
Reuters notes as much, pointing out that "as credit conditions have tightened in the world's second-largest economy, borrowing costs for companies have been rising. Banks are raising lending rates, including mortgage rates, and are wary of taking on more exposure to overheated sectors such as property. That trend will set the stage for a gradual slowdown in economic activity in coming months, analysts believe, though no one foresees a sharp decline as stability is the watchword ahead of a major political leadership reshuffle later this year"
Finally, as noted earlier this week, the near record plunge in China's credit impulse remains a major deflationary risk, and one which remains unclear how it will be resolved, unless Beijing gives up on its latest deleveraging ambition and once again engages in a full bore liquidity
Then again, maybe none of the above matters. As Zhu Ning, China's "Bubble Prophet" remarked laconically earlier this week "China may be different."