Basic Architecture of Chinese Economy Is Broken, Hedge Fund Manager Bass Says

Kyle Bass speaks during an event at Hudson Institute in Washington, on July 12, 2023. Screenshot via The Epoch Times

The Chinese economy is in trouble due to its heavy investment in the real estate sector, which could result in a crash worse than the 2008 U.S. financial crisis, a prominent hedge fund manager says.

Kyle Bass, the founder and chief investment officer of Hayman Capital Management, pointed out in an interview with CNBC on Feb. 5 that China’s economic “miracle” mainly relies on real estate to drive growth.

“The basic architecture of the Chinese economy is broken,” he said. “It’s broken because it was real estate-centric.

“The substantial majority of Chinese GDP growth was real estate and the concentric circles that surround real estate. And now, you’re having a reversal after an unregulated and unabated climb in real estate.”

The property sector accounts for 70 percent of China’s gross household wealth and about 25 percent of its gross domestic product (GDP), according to The Economist.

During the interview, Mr. Bass discussed the enormity of China’s property debts, citing those of Evergrande and Country Garden, the two largest Chinese real estate developers, which top $500 billion. Evergrande was ordered to liquidate by a Hong Kong court last week, and Country Garden has repeatedly failed to repay its outstanding debts.

Evergrande is the world’s most indebted firm, with $340 billion in debt. The company is at the center of a continuing property crisis that experts say hurts China’s economic growth. In July 2023, it posted combined losses of $81 billion for 2021 and 2022.

Last year, the troubled real estate giant filed for Chapter 15 bankruptcy protection proceedings in New York to shield itself from potential legal actions by creditors seeking to sue the company or seize assets in the United States.

Mr. Bass noted that during the U.S. financial crisis in 2008, the U.S. banking system lost around $800 billion. In comparison, the possible losses in the two Chinese property companies amount to $500 billion.

“We’re talking about $500 billion, where the losses are almost that much in two companies, and all the rest of the developers and bankruptcy,” he said, warning of a devastating outlook for the world’s second-largest economy.

“Now, you’re seeing real estate collapse,” Mr. Bass noted. “So, this is just like the U.S. financial crisis on steroids. They have three and a half times more banking leverage than we did going into the crisis. And they’ve only been at this banking thing for a couple of decades.

“China is going to get much worse no matter how much their regulators say we’re going to protect individuals from illicit short selling,” he said.

Mr. Bass also warned about China’s local government debts, which last year rose to around $13 trillion, or 76 percent of the country’s economic output in 2022, up from 62.2 percent in 2019.

Part of that is debt issued by local government financing vehicles (LGFV), which cities use to raise money for infrastructure projects, often encouraged by the central government to boost economic growth.

Mr. Bass said that the $13 trillion market is also contending with significant debt and defaults.

“We don’t even know where the bottom of that market is,” he told Epoch Times’ sister media outlet NTD last month in an interview.

China’s LGFVs have to pay a record $651 billion of bonds this year, according to Bloomberg.

“China has 20 plates spinning, and all the plates are crashing right now.” Mr. Bass stated.

China’s troubled property market has dragged down the economy, prompting the regime in Beijing to implement “temporary steps,” including 16 measures to support the sector, according to a report from the Atlantic Council GeoEconomics Center and the Rhodium Group, a Washington-based think tank.

However, the report said that approach didn’t address the core problem. It only focused “more on stability than market liberalization” because regulators offered extensions for repaying bank loans and relaxed lending restrictions for property developers.