Pressing the ‘Economic Nuclear Button’ Against China
Interview With Mr. Kyle Bass

The Liberty spoke with Kyle Bass, a prominent investor who made his anti-China stance clear, regarding his China strategy.

(Interviewer : Hanako Cho)

Kyle Bass

Hayman Capital Management, Chief Investment Officer
Kyle Bass was born in Florida. He graduated from Texas Christian University with a bachelor’s degree in finance. In 2005, Bass founded Hayman Capital Management. He is a life member of the Council on Foreign Relations, as well as a founding member of the Committee on the Present Danger: China.


Hong Kong, ‘No Longer the World’s Financial Center’

――Firstly, we would like to ask you about Hong Kong’s financial status after the National Security Law went into effect.

Kyle Bass: If you look at even the official data coming out of Hong Kong and the Chinese authorities, they are telling you that Hong Kong had a net exodus of over 100,000 people last year. If you look at the amount of capital that was redeemed from, essentially, their workers’ pension fund, it was significant and there were significant outflows.

You also have a scenario in which, for instance, the Hong Kong Tech Index, since basically mid-2018 has dropped about 60%. Compounding the issue is the fact that listed Chinese companies in America only recently reached a kind of quasi-agreement with the United States Securities and Exchange Commission to provide audited financial data and meetings with Western auditors as a potential condition going forward. That particular scenario had a one-day bounce in listed shares in Hong Kong and since then they’ve headed lower.

You’ve also got the most recent implementation of new restrictions in the CHIPS Act from the United States, severely restricting exports of any kind of, let’s say, low-nanometer, high-tech chips and equipment to the Chinese companies that are listed in Hong Kong.

The other thing that is vitally important today is the Federal Reserve Bank is raising rates faster than it ever has. Every time the U.S. raises rates, Hong Kong has to either raise them with us or lag behind. You’ve seen a massive deterioration in the Hong Kong monetary authorities’ excess reserves, or cash available, to defend its peg.

Every single indicator tells you that there’s money running from Hong Kong. [Hong Kong] has been displaced as the world’s financial center by Singapore already. That happened very quickly.

――There will be a point in which the Chinese authority will not be able to protect the Hong Kong dollar against the U.S. dollar anymore because they have to sell dollars and buy Yuan to defend its currency, right?

Bass: If you look at their current number of stated excess reserves, it’s about 118 billion Hong Kong dollars. That only amounts to about 15 billion U.S. dollars. When you think about the size of Japan and the U.S. economy, $15 billion is only one bad day.

I think the dollar peg system in Hong Kong is inevitably going to break. You’re going to see that either the Federal Reserve Bank or China, or both of them together, are going to break rigid currency pair given the dynamism in markets. Just look at the yen. The yen has gone from essentially 100 to 145 very quickly. The euro has plunged below parity, and the pound has plunged versus dollar.

Yet the Hong Kong dollar is strengthening in a scenario in which Hong Kong’s economy is literally circling the drain. We think real estate is down between 20% and 30%. One of my good friends was just forcibly moved to Hong Kong by his company, and he was able to buy a flat in a very nice part of town for 30% below the listed price.

――What will happen to the Chinese economy after the Hong Kong-U.S. dollar peg system collapses?

Bass: What people don’t realize is the Hong Kong dollar peg to the U.S. dollar is essentially a proxy for the offshore CNH as it relates to the dollar because of the linkage between HSBC Hong Kong and the People’s Bank of China (PBoC) and the dollar.

If that linkage breaks, and when it breaks, I think the PBoC is going to have to free-float the CNH. Imagine if it free-floated the CNH at the same time it was free-floating the HKD. That’s going to be a problem. How many Chinese people do you know that can’t wait to send their kids to school in China and invest more money in Chinese real estate? They all desperately want to invest abroad in countries that are not overseen by the Chinese Communist Party, and they want to send their kids to Western schools.

If you look back at the timing of Covid, the Hong Kong riots were at their zenith at the same time that the current account in China was heading negative because they were spending over $400 billion a year with the Chinese traveling abroad, spending abroad, investing abroad, sending your kids abroad.

So what did Covid do? It solved two of China’s most vexing problems simultaneously. It shut down Hong Kong and allowed China to take over Hong Kong and turn the riots off. At the same time, it fixed their current account problem. No more Chinese were traveling around the world. Covid solved two Chinese immediate problems at the same time.


‘Belt and Road Loans’ May Be Deemed Invalid

――Let me ask you about the implication of the Belt and Road initiative. Sri Lanka is borrowing so much money from China, but they can’t return it anymore. The number of these countries might be increasing, including Pakistan and African countries. What do you think will happen to China as a result of these bad loans?

Bass: The question is, ‘Are their loans honored?’ If you think about the way that they make the Belt and Road loans, they use the World Bank. There are five particular divisions of the World Bank and the one that oversees most of the world’s contract law is called ICSID.

ICSID is what the Chinese typically allow to adjudicate their Belt and Road lending. And so one of the conditions of a bona fide loan has to be that it can’t be entered into with a pretense of fraud or bribery. When you think about all of the Silk Road, Belt and Road loans, you know that they bribe local officials. Imagine if the world can prove that these loans were all entered into under false pretenses or under duress or under bribery or fraud. Then, the loans could be deemed invalid.

I think there’s going to be a lot of pushback from the African nations. I doubt Sri Lanka will push back, but I think Pakistan is probably in bed with the Chinese.


The ‘Quad Fund’ Must Strengthen Western Economic Security

Bass: When I think about the evil in the world, I think of totalitarian, evil regimes. You’ve got China, North Korea, and then much smaller nations. But those nations will end up banding together to try to conduct some kind of economic swap.

The rest of the West won’t. There’s a new fund initiative among the government of Japan, the U.S., Australia and India called the ‘Quad Fund.’ I have signed on to be a formal advisor to the Quad Fund. That fund is going to be an effort to develop better technologies and resources and serve as a grand strategy between the Quad and its allies to combat the totalitarian axis of evil.

――Many people say the Chinese economy will eventually collapse. So why hasn’t it? Do you think the bubble in China is about to burst or has it already collapsed?

Bass: When you look at the number of Chinese property developers that have entered into defaults or exchange programs for their debt, we’re now exceeding 15 of the largest developers in China who can’t repay their debts. 40% of China’s GDP is driven by real estate and the concurrent circles around real estate.

With the sky-high real estate prices, even though GDP was high, Chinese men that were graduating universities were actually moving back in with their parents and living in their parents’ basements because they couldn’t afford to buy a house or a flat, which means they weren’t marrying and having children. The birth rate came way below where Xi Jinping and the central planners wanted it to be. They figured that they must have real estate prices lower in order to have their economy grow properly.

Xi Jinping’s crackdown on real estate is not going to magically end and have real estate turn back up and go right back where it was. The West that has lent money to Chinese real estate is going to lose almost every dollar that they’ve lent to them.

The whole Chinese real estate edifice is going to get pressed down and kept down, and it’s going to default. Those shockwaves are going to be felt across the banking system. Almost 40% of Chinese loans on balance sheet are to real estate developers against real estate, and Hong Kong is even worse. Ireland and Iceland fell fastest in the European collapse from 2009 to 2011. Hong Kong is in that same position. It has about half of its loans lent either against Hong Kong or Chinese real estate and the banking system itself is 10 times its GDP.


To Prevent China’s Taiwan Invasion, the West Must Exclude China From the SWIFT Network

――What are your thoughts on the fragility of the Chinese economy? Does it really affect Chinese governance in the end?

Bass: One thing Xi Jinping has been faulted with is a very poor stewardship of the Chinese economy. Even though he has that problem with not stewarding the economy properly, he’s still going to emerge as one of the strongest rulers since Mao. Xi is not following an opening. He is closing the economy. He’s not following Deng Xiaoping’s opening to the West. He is shutting it down and closing it down.

I think China’s economy is headed in the wrong direction. I think their military is headed in the wrong direction, as you know, given what’s gone on with missiles flying into the Sea of Japan.

I think China will invade Taiwan in the next 18 months.

Every day that goes on, that Xi Jinping waits, [the U.S.] becomes more self-sufficient. We get ourselves in a slightly better place.

If you were Xi Jinping and you wanted to choose the point at which the U.S. was at its weakest strategically, I would choose right now. Every day that goes by, the U.S. becomes more self-sufficient. We get ourselves in a slightly better place. We are building new wafer fabs in Arizona, Texas, everywhere in the U.S. as fast as we can. But it’s going to take us at least four years to build these facilities. We are trying to re-shore our pharmaceutical production today. And every day that goes by, we get closer. At the same time, you also have our administration. Our administration right now is run by the oldest president the U.S. has ever had, Kamala Harris, who has absolutely no support, and Nancy Pelosi, who is about to retire.

So if I were Xi Jingping and wanted to go fight against the United States, I would choose the weakest United States, and that would be right now.

But when you look at China, they still have to procure, they still have to buy energy. They have to buy food. They have to buy basic materials and base metals from the rest of the world every day, and they have to pay for it in dollars. 84% of Chinese cross-border currency settlements still happen in U.S. dollars today.

So instead of us sending aircraft carrier groups, attack groups, or strike groups to the Taiwan Strait, why wouldn’t we simply sanction the Chinese banks and remove the banks from the SWIFT system and debilitate them, stop their ability from paying in dollars around the world? We could collapse their economy in a matter of months.

――So you mean that the U.S. has a nuclear button?

Bass: I call it the ‘economic nuclear button,’ or the ‘economic nuke.’ We still have it.

――And this option is now being discussed behind the scenes?

Bass: That’s correct. It’s being discussed in the halls of the Defense Department and in the halls of the Treasury Department.

Now, I believe it should be discussed openly. Because if you think about the Cold War, the reason the Cold War never turned into a hot war with Russia was because we both knew that we all had the nuclear weapons and that if one launched, the other had to launch. In this case, if China knows that we have the button and we will press it, and they know that, it may serve as a deterrent; it may stop them from invading Taiwan. I don’t think this should be a secret discussion. This should be an open discussion.

――The U.S. has passed the Hong Kong Autonomy Act in July 2020, but it wasn’t put into effect. Why?

Bass: There are a number of U.S. businesses that have enormous stakes in Hong Kong, and they lobby the U.S. government a lot. Let’s just say their ability to lobby the U.S. government on this issue has diminished greatly, and it has now become a geo-strategic problem, and it’s going to be much larger than a business lobby now. It has been a business lobby, and now it’s getting into the military realm. I think you’re going to see very different results from the United States going forward.


‘Businesses May Lose Everything in China’

――Why can you keep your stance, anti-Chinese stance, as an investor? Many Western investors and businesspeople are pro-China, but you are very anti-China from the beginning.

Bass: I studied the structure of their financial system beginning 2014. So I’m new to China — new in relative terms. Invariably, when you study the architecture of a financial system, you start reading about the history. You start understanding how the Politburo works and studying how it used to work. It’s inevitable that you understand the history of the country. I did so with Japan many years ago, and I love everything about Japanese culture. I love your people. I love everything about your country.

The exact opposite happened with China. I realized that their government is as evil as a government can be. I understand the forced organ harvesting. I understand the fact that they have no human rights beliefs and that their leadership is actually deeply evil. It’s not all of the people in China, but the government itself is out for one thing, and it’s out for global primacy at all costs. They lie, they cheat, they steal, they bribe. They do things that people in the West just don’t do.

When I think about China and Japan, they couldn’t be more different, and they’re right next door to each other. I am a realist. I just try to tell everyone exactly how I think it is.

Billionaires have financial stakes in China, and they have become evangelical about their own billions invested in China. I think they are corrupted by the Chinese government, making them cheerleaders for the Chinese government. I think that it’s greed. Greed has driven U.S. businesses to continue to invest in China, hoping to make more money at the end of the rainbow. I think many U.S. businesses are going to lose everything in China.

――That’s if they don’t get out of China right now, right?

Bass: Correct. So I met with a CEO —I’ll leave him unnamed— that runs a business that has more than $10 billion worth of business in China. And he says to me, off the record, ‘Kyle, I agree with everything you say. We are doing everything we can do to leave China as quietly as possible.’ They’re not going to tell you that until they’re already gone. I think you’re seeing enormous amounts of business leave China.

Pressing the ‘Economic Nuclear Button’ Against China
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