Anyone with investments in China should pull them out or risk losing them, warned Kyle Bass, an investor and founder of hedge fund Hayman Capital Management.
Not only is China’s economy in a precarious position, but if its increasingly aggressive stance toward Taiwan spills over into a military conflict, the country could be cut off from dollar-denominated financial markets and all foreign investment could be immediately lost, Bass said.
The collapse of the real estate market
The most immediate issue is the impending “implosion” of China’s real estate market, he said in a recent interview with Wealthion.
For decades, the ruling communist regime used property development to boost GDP and encouraged people to put their savings into housing. Speculation quickly became rampant in the market, causing real estate prices to skyrocket.
Last year, the market appeared to have reached a tipping point, with median home prices in tier-1 cities reaching 36 times the national median income, according to Bass, who noted that before the 2007 housing market crash, U.S. home prices were just six times the median income.
The affordability crisis then deepened the demographic stalemate in China. After the harsh “one-child policy” led to millions of forced abortions and sterilizations, a declining working-age population forced the regime to retreat from the policy to avoid economic disaster. Then came the housing affordability crisis.
“What’s happened is that Chinese men graduate from university and go back to living in their parents’ basements, not dating, not getting married, not having children,” Bass said.
The solution proposed by Chinese Communist Party leader Xi Jinping is for the government to force property prices down by curbing property speculation. However, more affordable housing means much less money for developers, who are also deeply in debt. Once things go sour with debt, those who invested in it will lose their money, Bass warned.
“The nine or 10 Chinese developers that are in some stage of insolvency today will stay in it, and if you’re a Western bondholder, what you’ll get for that will be zero,” he said.
“You get paid nothing, and that’s what you deserve for investing in such a regime as a Westerner.”
The regime tries to stimulate demand by lowering interest rates, but with poor results.
“They’re cutting rates and consumers aren’t responding, and from what my contacts are saying, it’s really worrying the central planners,” Bass said.
Falling home prices would also “decimate consumer spending” because Chinese households hold a large portion of their assets in real estate, he noted.
The government may eventually save the market by printing more yuan, but that will only work domestically. Foreign investors expect to be paid in dollars. China claims to have around $3 trillion in foreign exchange reserves, but Bass doubts that the money is actually available.
Taiwan – balancing on a knife edge
“The question is, if their internal market is doing as badly as they’re going to be able to function externally, and especially with their new war policy on Taiwan, you know, they’re really on a knife’s edge here,” Bass said.
“If they decide to move against Taiwan, their economy will go straight down the toilet in my opinion.”
The communist regime has recently taken a more aggressive stance towards Taiwan, firing missiles near Taiwanese waters. The immediate trigger was US House Speaker Nancy Pelosi’s visit to Taiwan, although the regime has been escalating its calls to take over Taiwan for several years.
Bass estimates that there is more than a 50 percent chance that China will attack Taiwan within 24 months.
“I think it’s inevitable that they’re going to pounce on Taiwan, and that’s going to change the whole game for people who have money invested in Chinese companies,” he said. “They have to get them back now.”
If China invades Taiwan, the United States can cut it off from the SWIFT banking system.
Such a move would cripple China’s foreign trade, as around 85% of international transactions are denominated in dollars.
Foreign investment in China at risk
The regime also recently issued a law under which property owned by foreigners can be confiscated in the event of war. This is exactly what happened to foreigners with investments in Russia after it invaded Ukraine in February of this year.
“The day Putin invaded Ukraine, everyone who had an investment in Russia lost everything,” Bass said.
“Hundreds of millions of dollars were written off to zero that day. The difference is that in China it will be tens of billions of dollars. They were able to sweep the Russian losses under the carpet, but you cannot sweep the Chinese losses under the carpet. So investing in a regime that is so diametrically opposed to the value system we all live by will 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 emphasized.
“We’ve allowed this frog to cook over time and they’re going to use it against us, so while we’re holding the nuclear button on their economy, they’re pulling the short end of the stick for us in a number of other situations.”
Translation the original one article: JS