Prominent short-seller Kyle Bass said on Wednesday that China needs a "reset" that will require it to recapitalize its banks and reset its relationship with the rest of the world, including the United States and President Donald Trump.
Bass, the founder of Dallas-based Hayman Capital Management, said at the Reuters Global Investment 2019 Outlook Summit in New York that the Chinese government's resistance to loosening control over business has contributed to an overleveraged financial system.
He projected that China could lose more than $2.5 trillion of equity, more than triple the size of the U.S bank bailout during the 2008 financial crisis, and would have to print more than $25 trillion of renmimbi to counteract the impact of slowing economic growth and declining credit on its banks.
"It's insane how levered this market has become," Bass said. "You're starting to see bankruptcies across the board in China that are hard to hide, if you look at the corporate default rate, the bankruptcy rate, M1 and M2 (money supply), the slowest money growth in over four decades.
"We'll have a reset in China, and I think it will happen in the next couple of years," Bass concluded.
Known for his successful bet against the U.S. housing market during the financial crisis, Bass said he has increased his shorting of the offshore Chinese yuan while maintaining a long U.S. dollar position.
Bass has long argued that the yuan is due to fall 30 percent against the dollar. He said he is breaking even on his currency bet.
He is not shorting individual Chinese equities, saying the regulatory environment promotes uncertainty. "It's the control of the sovereign," he said. "It's too dangerous."
That sovereign also needs to contend with increased tariffs and threats of tariffs by Trump, who has made trade policies he considers unfair a central tenet of his administration.
Bass, who said he is "not a Trump voter" - he would support a White House candidacy by former New York City Mayor Michael Bloomberg, should he run - nonetheless called Trump's trade policy stance toward China "100 percent healthy for the next 10 years," even though tariffs were "terrible" in the short run.
"Tariffs come and go," Bass said. "But how do you negotiate with someone... with the hopes that they would liberalize their economy and do the things they said they would do, and especially don't do the things they said they wouldn't do, and yet they've done everything exactly as they always have?"
Trump's shortcomings, Bass said, include his tweeting and other means by which he communicates his message.
"'Trade wars are good,' that was an insane comment to say," Bass said of Trump. "What he should have said is, 'We're going to reciprocate with China, where they're going to let us into their markets, we're going to let them into ours...' His actions were proper, but his comments were improper."
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