China’s economic troubles are much more severe than the Chinese Communist Party is willing to admit, with the performance of its government bonds an indicator of the sputtering Chinese economy, according to Kyle Bass, founder and chief investment officer of Hayman Capital Management.
“Think about that,” Bass said. “Think about what the Chinese bond market is telling you that the Chinese Communist Party won’t tell you—telling you that China is in a recession.”
Bond yields and bond prices move in the opposite direction. Prices in China’s bond market have been on the rise for a decade, but the increase took off about two years ago when China experienced a stock market downturn and a real estate crisis. The dual problems promoted a rush of capital into bank deposits and the debt market.
Bass said on “American Thought Leaders” that Chinese banks are insolvent and represent 350 percent of China’s GDP.
“And almost 40 percent of bank assets in China are lent to domestic real estate,” he said. “So if your real estate market is down 30 to 50 and your economy is 3 1/2 times levered to your banks, and your banks are insolvent, you have a real problem.”
“Their problem is larger than ours was during the global financial crisis.”
Bass noted that the Chinese regime would never reveal its banking troubles because it does not want to appear weak.
“But it’s easy to see the architecture of their economy, what they did wrong and what they’ve done wrong and what’s happening internally,” he said.
The ongoing real estate crisis has dampened consumer spending. According to data from China’s National Bureau of Statistics (NBS), retail sales increased by 3 percent in November from the same month in 2023, falling short of a Reuters poll’s prediction of 4.6 percent growth.
Additionally, according to NBS data, new home prices in China dropped by 5.7 percent in November, the 17th consecutive month of declines.
Before the current real estate crisis, China experienced a property boom that lasted more than 10 years. However, according to Bass, that boom has resulted in its plummeting birth rate.
“[Chinese authorities] allowed real estate prices to get so high that no one can afford them coming out of university. Therefore, [China’s] birth rate collapses, which became a real problem,” Bass said. “It was because they allowed this rampant speculation in real estate, which basically was the Chinese miracle.”
“Our total imports in the U.S. are about $3.2 trillion; about $600 billion come from China,” Bass said. “Our economy is about $30 trillion.
“Is it the end of the world if we have to find alternate supply chain deliveries from China? It’s not the end of the world.
“We’ve allowed that frog to boil over time, and now we’re in a very vulnerable situation,” he said, pointing to U.S. dependence on Chinese imports, such as rare earth metals and pharmaceutical ingredients.
“If you have an adversary that is marching down the road to war, you better figure it out quickly.”
