An aerial view of the Evergrande Changqing community in Wuhan, Hubei Province, China, on Sept. 26, 2021. (Getty Images)
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Anybody holding an investment in China should withdraw it or face the risk of losing the money altogether, warned hedge funder Kyle Bass.
Not only is the Chinese economy in a precarious position, but if its increasingly aggressive stance toward Taiwan spills into a military conflict, the country could quickly become dislocated 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 Real Estate Market
The most immediate problem is the looming implosion of China’s real estate market, he said during a recent Wealthion interview.
The ruling communist regime has for decades used real estate construction to boost GDP figures, encouraging people to put their savings into housing. The market quickly got rife with speculation, sending real estate prices soaring.
Last year, the market seemingly reached a breaking point with median home prices in first-tier cities being 36 times the country’s median income, according to Bass, who noted that before the housing crash of 2007, the U.S. home prices were just six times the median income.
The affordability crisis has then exacerbated China’s demographic impasse. After the regime’s brutal “one-child policy” led to millions of forced abortions and sterilizations, declining working-age population forced the regime to walk back the policy to avoid economic disaster. Then the home affordability crisis struck.
“What happened is Chinese men are graduating university and they’re going back to live in their parents’ basement and therefore they’re not dating, they’re not marrying, and they’re not procreating,” Bass said.
The solution put forward by Chinese Communist Party leader Xi Jinping is for the government to force house prices down by curbing real estate speculation. But more affordable homes mean much less money for the developers who are deep in debt at the same time. As the debt turns bad, those who invested into it will lose their money, Bass warned.
“The nine or ten Chinese developers that are in some 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, it rhymes with ‘hero,’” he said.
“You’re not going to get paid anything and that’s what you’re going to deserve for investing in a regime like that as a westerner.”
The regime has been trying to stimulate demand by cutting interest rates, but with poor results.
“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,” Bass said.
Declining home prices would also “decimate consumer spending” because Chinese households hold so much of their assets in real estate, he noted.
The government can ultimately 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 currency reserves, but Bass doubted the money is in fact available.
‘Walking the Razor’s Edge’ on Taiwan
“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,” Bass said.
“If they decide to move on Taiwan their economy is going to, I think, fall directly into the toilet.”
The communist regime has recently assumed a more aggressive stance toward Taiwan, shooting missiles close to Taiwanese waters. The immediate trigger was House Speaker Nancy Pelosi’s visit to Taiwan, though the regime has been escalating its calls for a Taiwan takeover for years.
Bass estimated more than a 50 percent chance China will move on Taiwan within 24 months.
“I think it’s inevitable that they move on Taiwan and that changes the whole ball game for people that have money invested in Chinese companies,” he said. “They need to get it out right now.”
If China invades Taiwan, the United States may cut it off the SWIFT banking system.
“We’re not socializing that concept but I can tell you, behind the scenes, we are talking about it right now,” Bass said.
Such a move would cripple China’s foreign trade since some 85 percent of its cross-border transactions are dollar-denominated.
Foreign Investments in China at Risk
The regime also recently issued a law that foreign-owned assets can be confiscated in case of war. That’s exactly what happened to foreigners with investments in Russia after it invaded Ukraine earlier this year.
“The day Putin invaded Ukraine, anyone that had investments in Russia lost everything,” Bass said.
“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 and you’re not going to be able to sweep the Chinese losses under the rug. So 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 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 allowed that frog to boil over time and they will use that against us and so while we hold the nuclear button on their economy, they have us by the short hairs in a number of situations.”