Kyle Bass Warns: Xi Has "Built The Chinese Economy On A Foundation Of Sand"

Earlier this week, Chinese leader Xi Jinping became the third ruler in the communist country’s history to have his named enshrined in its constitution – and the first to receive this honor while still alive. But as China celebrates its most popular, and most powerful, leader since at least Deng Xiaoping, Kyle Bass, hedge fund manager and noted China bear, told Bloomberg the Communist Party will one day regret standing idly by as Xi consolidated his power.

“Today Xi is celebrated in media reports, but when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sand,” Bass, founder of Hayman Capital Management, said in an email Wednesday.

“Xi desperately seeks credibility, but true developed economies do not impose severe capital controls or move short-term rates hundreds of basis points overnight in attempts to manipulate their own currency.”

Xi, who launched the twice-a-decade National Party Congress last week with a three-hour speech where he laid out his vision for “communism with Chinese characteristics in a new era,” the philosophy that was enshrined in the country’s constitution by a unanimous vote. In a move that seemingly confirms suspicions that Xi plans to break with precedent and seek a third term after his second ends in 22, Xi appointed five new members to the Politburo,

China’s most powerful body, all of whom are too old to be viewed as credible heirs. Typically, Chinese leaders have pointed to a successor or possible successors by the time they begin their second term, ensuring that there’s a clear path of leadership transition.

Of course, Bass and others have been highly critical of the Communist Party’s heavy handed tactics. For example, the PBOC and the Chinese ‘National Team’, which exert powerful influence over the company’s financial market, have successfully tamped down equity market trading volume and volatility in the runup to the Congress, while guiding the yuan higher against the dollar.

However, China’s closed financial system and manipulated markets aren’t the only target of Bass’s criticism. He also pointed to China’s ever-growing pile of debt. Borrowing has swelled to 260 percent of gross domestic product at the end of 2016, Bloomberg Intelligence data show. Earlier this year, the country’s soaring debt burden inspired Moody’s Investors Service and S&P Global Ratings to downgrade the country’s sovereign credit rating.

In an interview earlier this month, Bass, who has called for a 30% drop in the Chinese yuan, said he expects the government to relax its grasp on the exchange rate after the National Party Congress. He said he believed once Xi consolidates power, he’ll allow natural economic forces to reassert themselves in the country’s banking system.

Since the yuan joined the IMF’s Special Drawing Rights basket a year ago, China has made little progress in making its currency more convertible and accessible. To wit, the yuan remains a secondary currency for settling global payments.

“China remains an emerging backwater when it comes to global currency settlements,” he said Wednesday.

As Bloomberg pointed out, Bass, who made a fortune betting against U.S. subprime mortgages, said in early 2016 that losses in Chinese banks could be four times bigger than those suffered by American lenders during the global financial crisis. He has said that crucial figures, like the share of non-performing loans, have been understated.

“Recklessly growing a banking system in pursuit of global economic growth and respect will cause severe financial instability in the years to come,” he said on Wednesday.

 

“The dangerous $40 trillion credit experiment with Chinese characteristics will run its course.”

As reported earlier this month, Bass has stuck to his pessimistic views on China (though he has moderated his view a bit, pushing back his expected timeline for signs of instability in the country’s debt market to emerge) while other noted bears reversed their positions as the next big yuan devaluation failed to materialize.

While China bears have underestimated the nation’s unique ability to control its market, the sheer pace and volume of credit creation can’t possibly be sustained forever, Bass said.
 

Comments

Laowei Gweilo nmewn Thu, 10/26/2017 - 21:38 Permalink

China Don't Care.e.g. Uncle Xi wakes up one morning and decidesm "sand is now worth ¥100 instead of ¥10"Kyle Bass "Q_Q"versus command economy, you can only [allowably*] short it as far as its EXTERNALTIES, and the problem Bass made is that he went for broke on internalities (in terms of macro terminology, not micro terminalogy -_-) AKA China Still Don't Care[*what that means is, obviously you can short it but only if they let you... plenty of people short within china, but they really don't like foreigners shorting their currency, and will take a LOSS to save face on that]

In reply to by nmewn

wee-weed up abyssinian Thu, 10/26/2017 - 22:05 Permalink

  He's right, of course.But Xi & the ChiComs can probably keep "kicking the can down the road"...And postoning the eventual '"reconing" far longer...Than anyone today can take financial advantage of it by betting against it.The ChiComs will ALWAYS play the "long game"...And do every thing they can prop it up...And make sure it will last any way they can.

In reply to by abyssinian

BobEore wee-weed up Thu, 10/26/2017 - 22:30 Permalink

...when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sand,” Bass, founder of Hayman Capital Management, said in an email Wednesday...

put in a slightly more correct context -

/he will be celebrated, for having built the Chinese economy on a foundation of

THE SANDS/FLAMINGO/ALADDIN/RIVIERA/TROPICANA...

etc., and the successful transition of WEALTH N POWER by which the owners of INTERNATIONAL FINANCE CAPITAL arranged to relocate east from west... will be celebrated in the temples of talmudists as the beginning of the 'new jerusalem' millennia of history...

when their power over earthlings went unchallenged... and they were WORSHIPPED as gods agin!

And Bass("Hayman Capital" 0h vey!)like Sgt Schultz...
knows NOTHING... NOTHING AT ALL!

Blackjack Manchurian Candidate: "yu didn't build that!"
Lansky Mafiya scion: "yes we can!"

https://storify.com/SuaveBel/israel-s-new-asian-allies
wHOs zoomim whom here?

In reply to by wee-weed up

old naughty BobEore Thu, 10/26/2017 - 22:47 Permalink

"and the successful transition of WEALTH N POWER by which the owners of "xyz" arranged to relocate east from west..."as THEY say: as west, so east...but we are in for specis survival fight, as above, so below, no?physical fight we will not win (against a very knowledgeable and ancient opponent) !Just ponder the parallel, blood flow into brain : money flow into ego-mind.

In reply to by BobEore

Escrava Isaura old naughty Fri, 10/27/2017 - 02:32 Permalink

“Xi Has "Built The Chinese Economy On A Foundation Of Sand"— Kyle Bass A quote complaining about ‘morality’ from a financial gambler, go figure. Now try this 2008 quote: “When there are sand castles built on beaches, there are lots of small waves which may hit them, without any negative result. But when a tidal wave comes, everything is wiped out.” — Ben Bernanke.   Wait, it gets better. wee-weed up: Xi is right, of course….keep "kicking the can down the road" far longer than anyone (Jews and Christians) today can take financial advantage of it by betting against it.   China is not America. China has being there for over 3 thousand years. It will not obey orders from Jews or Christians, honey. They just won’t.   

In reply to by old naughty

MEFOBILLS Escrava Isaura Fri, 10/27/2017 - 13:45 Permalink

People who are immersed in "market" economics, and who know little about monetary history, keep making fundamental mistakes in logic.  I call this "whistling past the graveyard."Bass is bleeting out his insecurities because he doesn't understand things:Comment:“Today Xi is celebrated in media reports, but when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sandNot out of sand.  They have managed to import many 100's of years of western patrimony, in the form of knowlege, to then build out their industry.  Wall street helped as an agent, as it desired Chinese wage arbitrage.  Wall Street finance wizards like Bass, greenmailed American industry to be re-located.  So who is the real fool?  Wall Street mavens or the Chinese? The West sold its patrimony for profits today at the expense of the future, and the future is now here.China's Belt and Road initiative follows good economics.  Opening up new markets and new sources for raw materials is fundamentally sound.  All economy can be reduced to humans pumping the earth to make goods as prices.  Services can be considered as a price too as ultimately it makes a good.With regards to Chinese debts, those are denominated in Yuan.  ALWAYS look at the type of debt, where it is lodged, and what it is denominated in.  ALWAYS look at what the debt instrument is demanding.  Chinese debts are fundamentally different than Western.  A significant amount of their debt instruments are from China STATE BANKS.  STATE BANKS can erase Yuan debts via the law. The West cannot easily jubilee debts, and worse, Western Oligarchial debt holders make demands and usurp governments and law.  The western ideology is I got mine, F**K you.  Keep paying me my usury debt slave. China's bureaucracy is fascist in that it commands the economy, similar to Frederick List's and then U.S economist Peshine Smith's methods, and then Japan's Manchurian economists (who followed List and Smith).China erased their Communist era debts in order to meet MFN targets laid out under Clinton administration.  They did bookeeping slight of hand by moving communist debts to a different ledger.  Presto Chango, the debt disappears.  If a debt instrument is not making claims, it is as good as gone.  (The FED did something similar with MBS, where they paid face value for them with new keyboard money.  MBS's transferred from TBTF banks, and landed on the FED's ledger.)China and Russia are also swapping debt instruments, which then creates Yuans and Rubles, which then allows them to trade GOODS with each other.  This particular kind of debt is positive in that it stimulates activity.  For example, this method is being used to build oil pipelines from Russia to China.China and Russia will continue to grow, as they are properly managing their economies and opening up new markets and access to earth's resources.  The west - not so much.  Zio banksters have used their usury income to fund a fog of confusion about economy, so few can see clearly.  A western economist cannot graduate unless he mouth's the right platitudes.Here's the hard truth:  Nazi's did many economic things correct.  The Russian's are on the right path.  Deal with it, or whistle.Xi is correct, those who are ignoring him, and Stolypin group in Russia, are whistling past the graveyard. There is something called Logos, or natural law.  Ignore natural law, including economic natural laws, at your own peril. 

In reply to by Escrava Isaura

ds Laowei Gweilo Fri, 10/27/2017 - 00:25 Permalink

You can short through proxies. You can short the currency where they have less control and where their money pumps have to meet the size of global funds that is larger than any one nation. Hoping that China really does not care and bet the farm (their People) for the massive transfer of wealth to Others. It had happened before in its history of underestimating Others.

In reply to by Laowei Gweilo

Laowei Gweilo ds Fri, 10/27/2017 - 06:43 Permalink

yup but even that becomes harder... hence not just the capital controls but chat controls, social media and app controls, etcthey're taking an iron grip over not just money but how people can move or even talk about money. PRO TIP: don't talk about evading currency controls on WeChat! you'll end up in a gulag. tbh, i don't think i'd talk about shorting the yuan even from outside the country (only to have to pass through their fire wall that monitors WeChat protocols being sent from outside the country). use a VPN for, ironically, making it look like you're IN (not out) of china haha

In reply to by ds

bentaxle GunnerySgtHartman Fri, 10/27/2017 - 04:21 Permalink

I don't think he will be the one they aim at.Xi likely knows or at the very least suspects monumental failure in the near future. Chinese top brass may even have plans for it. For which Xi demanded "protection" today - in his lifetime, to wit, " Xi Jinping became the third ruler in the communist country’s history to have his name enshrined in its constitution – and the first to receive this honor while still alive."It would be unthinkable of the Chinese hierarchy to blame someone in this position. Because it would mean that the Chinese Communist Party was fallible, was capable of making mistakes that meant....it couldn't be relied upon to run the country. (Oops.) So they will be blaming someone or something else.

In reply to by GunnerySgtHartman

nmewn ebworthen Thu, 10/26/2017 - 21:33 Permalink

Don't forget Jeff Immelt shutting down plants in Wisconsin to send to China, i-shit suicide nets and printing up labor to build ghost cities. I mean, ya gotta keep a half a billion hands busy...lest they find something else to do with them.Kill the pigs and dump em in the river! ;-) 

In reply to by ebworthen

Son of Captain Nemo Thu, 10/26/2017 - 21:13 Permalink

Hey Kyle!...

What about your "foundation of sand" that you and George Soros "your best friend" helped to construct here at home partner?...

You need to find the Marine who whacked your buddy Chris Kyle and invite all your best friends to a George Soros tribute party with the guest of honor and "Vampire" getting the first hollow point to the temple finishing with you LAST!!!

pigpen Thu, 10/26/2017 - 21:15 Permalink

Kyle, when are you going to attack the fake digital advertising fraud and effectiveness of digital advertising?When do businesses question the effectiveness of their advertising budgets?Everybody in top income and education quartile use adblocking browser and have opted out of distraction.What is all this garbage worth when the eyeballs of biggest spenders are unable to be reached by advertising and digital tracking?Use brave browser. Time to destroy these ad fraud businesses. Brave blocks tracking, advertising and malware by DEFAULT and blocks ads on YouTube.Cheers,Pigpen  

HRH Feant2 Thu, 10/26/2017 - 21:17 Permalink

Funny advert on this page: CSXE, Chinese ex-state owned enterprises ETF offered by Wisdom Tree at current price of $81.29.

Sketchy. An ex-state owned enterprise? Wow!

nmewn HRH Feant2 Thu, 10/26/2017 - 21:25 Permalink

GSE's...lol...you should try and read one of their earning statements..."We had a good second quarter thanks to Chairman Xi's regulations & guidance of the sheeple's yaun towards our growing monopoly. We expect outsized returns in the coming quarter with respect to the Chinese government continued support of our executive salaries and a new five year plan to force the sheeple into direct deposit ownership of our shares!"...its like straight out of the ObaMao playbook ;-)

In reply to by HRH Feant2

Blue Steel 309 Thu, 10/26/2017 - 21:18 Permalink

I will say it again. You can not understand China based on the delusions of the west. The entire financial and monetary system in the West is a fucking fraud. China is exploiting the insanity of the West, there is no way they can lose.

These clowns are mad because they don't control the "house" in China, and the house always wins.

Cabreado Thu, 10/26/2017 - 21:25 Permalink

Generally, sand is much sturdier than swamp, ya know...and then there's that pesky little issue of prescribed govt control in China vs a Constitution of a different kind here...much more headroom for misery in China; aka flexibility.