Take your money out of China

Anyone with an investment in China should pull it out or risk losing the money altogether, hedge funder Kyle Bass has warned.

Not only is China’s economy in a precarious position, but if its increasingly aggressive stance toward Taiwan escalates into a military conflict, the country could quickly break away from dollar-denominated financial markets and all foreign investment could be instantly lost, said Bass, founder. and Chief Investment Officer of Hayman Capital Management.

Implosion of the real estate market

The most immediate problem is the impending implosion of China’s property market, he said in a recent Wealth maintenance.

The ruling communist regime has for decades used housing construction to boost GDP figures, encouraging people to invest their life savings in housing. The market quickly became inflamed with speculation, sending real estate prices skyrocketing.

Last year, the market apparently reached a breaking point, with median home prices in first-tier cities representing 36 times the nation’s median income, according to Bass, who noted that before the housing crash of 2007, home prices in the United States were only six times higher than the median income.

The affordability crisis then exacerbated China’s demographic impasse. After the regime’s brutal “one-child policy” led to millions of forced abortions and sterilizations, the decline of the working-age population forced the regime to reverse its policy to avert economic disaster. . Then the housing affordability crisis hit.

“What’s happened is Chinese men are graduating from college and they’re going back to living in their parents’ basement and so they’re not dating, they’re not getting married and they’re don’t procreate,” Bass said.

The solution proposed by Chinese Communist Party leader Xi Jinping is for the government to lower property prices by curbing property speculation. But more affordable homes mean far less money for developers who are at the same time deeply in debt. As debt gets bad, those who invested in it will lose their money, Bass warned.

“The nine or ten Chinese developers that are at a stage of default today, they’re going to stay in default and if you’re a Western bondholder, what you’re going to get in return, that rhymes with ‘hero’,” he said. .

“You’re not going to get paid anything and that’s what you deserve for investing in a scheme like this as a Westerner.”

The regime tried to stimulate demand by cutting interest rates, but with poor results.

“They’ve cut the rates and there’s been no response from consumers and that’s really troubling the central planners from what my contacts there are saying,” Bass said.

Falling house prices would also “decimate consumer spending” as Chinese households hold a large portion of their assets in real estate, he noted.

The government may eventually bail out the market by printing more yuan, but that will only work domestically. Foreign investors expect to be paid in dollars. China claims some $3 trillion in foreign exchange reserves, but Bass doubts the money is in fact available.

“Walking on the Razor’s Edge” in Taiwan

“The question is if their internal market is doing so badly, how are they going to be able to operate outside and especially with their new militaristic belligerence vis-à-vis Taiwan, you know, they are really walking on the wire of the razor here,” Bass said.

“If they decide to move to Taiwan, their economy will, I think, go straight down the toilet.”

The communist regime has recently taken a more aggressive stance towards Taiwan, firing missiles near Taiwanese waters. The immediate trigger was House Speaker Nancy Pelosi’s visit to Taiwan, though the regime has escalated calls for a takeover of Taiwan for years.

Bass estimated the odds of China moving to Taiwan within 24 months at more than 50%.

“I think it’s inevitable that they’ll move to Taiwan and it changes the whole ball game for people who have invested money in Chinese companies,” he said. “They need to get him out now.”

If China invades Taiwan, the US could cut it off from the SWIFT banking system.

“We don’t socialize this concept but I can tell you, behind the scenes we’re talking about it right now,” Bass said.

Such a move would cripple China’s foreign trade since some 85% of its cross-border transactions are denominated in dollars.

Foreign investment in China at risk

The regime also recently enacted a law that assets held by foreigners can be confiscated in the event of war. This is exactly what happened to foreigners with investments in Russia after the invasion of Ukraine earlier this year.

“The day Putin invaded Ukraine, everyone who had investments in Russia lost everything,” Bass said.

“Hundreds of millions of dollars were wiped out that day. The difference is that in China it will be tens of billions of dollars. They succeeded in sweeping the Russian losses under the rug and you will not be able to sweep the Chinese losses under the rug. So investing in a regime that is so diametrically opposed to the value system we all live in will eventually bite investors hard.

The problem for the United States is that it has allowed itself to become dependent on Chinese imports in critical areas, such as antibiotics and other key medicines, Bass pointed out.

“We let this frog boil over time and they will use it against us and so while we hold the nuclear button on their economy they have us by the short hair in a number of situations.”

Follow

Petr Svab is a journalist covering New York. Previously, it covered national topics such as politics, economics, education and law enforcement.