Hedge fund manager Kyle Bass warned that anyone holding any investments in China should take them out immediately, or they could risk losing everything.
Bass, founder and chief investment officer of Hayman Capital Management, said, “Not only is the Chinese economy in a precarious position, if its increasingly aggressive stance toward Taiwan becomes a military conflict, the country could quickly become dislocated from dollar-denominated financial markets and instantly lose all foreign investment.”
Real estate market crash
In a recent interview with Wealthion, Bass said that the most immediate problem is the imminent collapse of the Chinese property market.
The Chinese Communist Party (CCP) has for decades used real estate construction to boost GDP figures, encouraging people to put their savings into real estate. The market was quickly flooded with speculation, causing property prices to skyrocket.
Last year, the market seemed to have peaked, with average home prices in first-tier cities being 36 times the national median income. Bass also noted that before the 2007 U.S. housing market crash, U.S. home prices were only six times the average income.
After the CCP’s brutal “one-child policy” forced millions of women to have abortions and sterilizations, China’s working-age population shrank. This forced the communist regime to withdraw its one-child policy to avoid economic disaster.
Bass said, “What happened is Chinese men are graduating university and they’re going back to live in their parents’ basement and they’re not dating, they’re not marrying, and they’re not procreating.”
The solution proposed by CCP leader Xi Jinping is for the government to lower housing prices by curbing real estate speculation. But more affordable homes means debt-ridden property developers are making less money. As the debt situation worsens, prepaid homebuyers and investors will lose money, Bass warned. He revealed that nine or 10 Chinese developers are currently in default, and they will remain in default.
If you are a Western bondholder, what you will get is 0. You won’t get paid anything.
Beijing is trying to stimulate demand by cutting interest rates, but the results have not been positive.
Bass said, “They’ve been cutting rates and there’s been no consumer response and it’s really troubling the central planners from what my contacts say over there.”
Falling house prices will also lead to sharp cuts in spending by consumers, he said, because Chinese households keep too much of their assets in real estate.
Chinese authorities may eventually bail out the market by printing more yuan, but that will only work domestically. Foreign investors expect to be paid in U.S. dollars. China claims to have about $3 trillion in foreign currency reserves; However, Bass is skeptical about this number.
‘Walking on a razor blade’
Bass pointed out: “The question is if their internal marketplace is doing so poorly, how are they going to be able to function externally, and especially with their new militaristic belligerence vis-a-vis Taiwan, you know, they’re really walking the razor’s edge here.”
“If they decide to move on / attack Taiwan, their economy is going to, I think, fall directly into the toilet.”
The CCP has recently taken a more aggressive stance towards Taiwan with the move to fire multiple ballistic missiles near Taiwan’s waters. The surface cause is US House Speaker Nancy Pelosi’s visit to the independent island nation, but Beijing has been escalating calls for a takeover of Taiwan for years.
Bass estimates there is more than a 50% chance that China will attack Taiwan within 24 months.
Bass said, “I think it’s inevitable that they move on / attack Taiwan and that changes the whole (ball) game for people that have money invested in Chinese companies. They need to get it out right now.”
If China invaded Taiwan, the U.S. could cut it off from the SWIFT banking system. Such an action would cripple China’s foreign trade, as about 85% of the CCP’s cross-border transactions are conducted in dollars.
Foreign investment in China faces many risks
The CCP recently enacted a new law that stipulates that foreign-owned property can be confiscated in the event of war. That is exactly what happened to foreigners investing in Russia after Russia invaded Ukraine earlier this year.
Bass said, “The day Putin invaded Ukraine, anyone that had investments in Russia lost everything.”
“Hundreds of millions of dollars were written down to zero that day. The difference is, in China, it’s going to be tens of billions of dollars. They were able to sweep the Russian losses under the rug [but] you’re not going to be able to sweep the Chinese losses under the rug. Investing in a regime that is so diametrically opposed to the value system that we all live by is going to end up biting investors hard.”
The problem for the United States, Bass pointed out, is that it has left itself dependent on imports from China in many key areas, such as antibiotics and other essential medicines.
He said, “We allowed that frog to boil over time and they will use that against us.”