Global Stocks Plunge As China Devalues The Yuan; Hayman Capital’s Kyle Bass On What China’s Decision Means For Investors Around The World
Global stock markets saw a major selloff today after Beijing announced overnight that it was devaluing the Yuan in response to POTUS Trump’s threat to impose additional tarriffs on Chinese imports to the United States beginning next month. The Yuan overnight, fell to its lowest level in 11 years, since the 2008 financial crisis. Hayman Capital Management Founder and China expert Kyle Bass was interviewed by phone this afternoon on CNBC’s Closing Bell. Mr. Bass, who is very smart and knowledgeable when it comes to Chinese debt, is very bearish on the outlook for China’s economy; and, is betting against the Hong Kong dollar. When asked “what was the significance of what happened overnight?,” Mr. Bass said “I think it is important to realize that the Chinese have only been at this capital markets thing for the last 15 years; and, while they’re smart, he equates it to being at a circus and they have to have all twenty plates spinning at the same time. And, if one of the plates fall, they all fall. And, in this case, what’s happening in China is they have to have dollars to sell, to buy their own currency to hold it up. If they were ever to free-float their currency, I think it would drop 30-40 percent. And, the reason being is they claim to be 15 percent of global GDP in dollar terms — but, less than one percent of global transactions settle in their own currency. And so, they prop their currency up. Everyone calls them a currency manipulator; but, Beijing is [juggling these 20 plates] trying to hold this whole thing together. If they were to let it go, and allow the wealthy Chinese to get their money out, and buy more houses in Vancouver, London and the U.S., and send more of their kids to college in the U.S., you would see their currency collapse. And, that’s why they keep such a tight lid on it. In the end, they have to have dollars to support their currency — and, they are running out of dollars. So what they did — is they just stopped supporting [backstopping] it [the Yuan]. They didn’t intentionally weaken it, they just stopped supporting it at a certain level.
When asked if Beijing’s move was in response to POTUS Trump’s announcement that — absence a trade deal — additional tarriffs would be imposed next month — Mr. Bass said that’s probably right; but, added it was more important regarding what happening/is happening behind the scene. Back a month ago when the U.S. was negotiating with China, the U.S. had a 150 page document that Beijing said it intended to sign; and, the night before the scheduled signing, China took 50 pages out of the agreement — anything that was measurable and enforceable got taken out — and, said, “we’ll sign this agreement.” So, China negotiated in bad faith, and that’s why the talks broke down. During the most recent meeting with U.S. negotiators last week, China insisted that the U.S. drop all tarriffs on Chinese goods, stop disallowing Huawei in the U.S., and release the Huawei CFO [currently under arrest in Canada] before we even engage in talks. And, the U.S. said that’s not going to happen. So, China’s trade negotiators then stood up and walked out of the room. And so somehow we’re [the U.S.] the ones negotiating in bad faith and its all POTUS Trump’s fault — when it is China that has been negotiating in bad faith all along.
So, what happens next?, Mr. Bass was asked. Look, if China runs out of dollars, — you need to remember, Beijing needs dollars to buy everything that they import.They desperately short energy, they’re desperately short basic materials, they’re desperately short food, and they have to pay dollars to get those goods. They can’t pay with Reminbi or ‘monopoly money,’ — they have to use real currency. And, if they’re running out of real currency, and they’re running a current account deficit and a fiscal deficit, then what happens next is that they start to lose control of their currency. And, I [Mr. Bass] think that is some of what you are seeing today, When asked why he thought Beijing was losing dollars, Mr. Bass said it is important to think back to South Korea in 1997-1998. They supposedly had the largest reserve of FX currency in Asia during the Asia financial crisis. And, they called Treasury Secretary Summers at the time and said, “Mr. Summer’s we need more dollars. Mr. Summers responded “what do you mean. You guys have the largest reported stack of dollars in Asia. And, they said, “we’ll we’ve kind of already allowed our banks to borrow them from us, and they sold them — but, we still hold them as an asset on our balance sheet. Look at the Chinese banks balance sheets over the last twelve months. They converted to being massively U.S. dollar heavy, to massively U.S. dollar short. Beijing has been selling dollars in the foreign market in an attempt to artificially prop up their currency. And, at some point in time — that stops. And, Mr. Bass said he thinks “that’s somewhere around now.”
If they are allowing their currency to fall; and maybe even further, does he [Mr. Bass] think the U.S./China ‘trade war’ has entered a new phase? Mr. Bass said he thought the new phase began when the U.S started pushing back. We’ve never pushed back on any of their policies before — because they always been able to buy everybody. And in this case, they haven’t been able to buy everyone in this administration. Mr. Bass called this a clash of cultures, and you’re seeing it between someone who is negotiating in good faith and someone who refuses to do the same. China has never lived up to even one thing that they said they would do as they ascended into the WTO in 2001, and the U.S. is finally trying to get Beijing to sign an agreement that is measurable and enforceable. And, they won’t do it.
What’s important to realize, Mr. Bass said, is that the U.S. holds all the cards. Beijing needs dollars to operate its economy. And so, we hold all the cards in this negotiation. So what if some shoes we buy at Walmart cost a little more. We lost 4.5 million jobs in the first five years of China’s WTO ascension in 2001. As a result of China’s WTO ascension — within five years all of our industry was hollowed out. And, you know what, we can buy things from Vietnam, or Cambodia, etc.
When asked by a CNBC commentator how many more 1,000 point drops in the stock market POTUS Trump might be willing to take with a new presidential election in the offing — Mr. Bass responded: “Do you think we should trade U.S. national security in the long run for a stock market decline. I do not care Mr. Bass said. And truthfully, I think we’re comparing economics with the long-term viability of our country. And, I think that’s the disconnect that commentators have today, [Bravo!]. We’re trying to get China to stop stealing our intellectual property, to stop subsidizing industries in China and dumping things here, to stop China from stealing from our national labs; and try and get them to agree to re-set the entire relationship. This isn’t about some tarriff and trade. We just put 10 percent tarriffs on $300B in goods — that’s $30B. We’re talking about a $13T economy in China, and a U.S. economy of $20T. Do you really think $30B means anything? It doesn’t mean anything. We’re trying to re-set our relationship. What POTUS Trump’s team is doing is systematically negotiating all of those points into a new agreement that China has to sign — and God forbid — might have to live up to it.
With respect to the ongoing protests in Hong Kong, if that situation deteriorates even further, the impact on China’s currency is going to be even more negative than it already is — yes? Mr. Bass agreed. If you were a business in Hong Kong, or thinking about doing business there anytime soon — would you be committing more financially there in this environment? Not likely Mr. Bass said. Would you be moving more of your family and assets to Hong Kong, or out? The people of Hong Kong have lost complete faith in their leadership, and their own police force. It is such an ominous thing for the people of Hong Kong to lose faith in their leadership — and, just think about what happens — when that happens. Think about Argentina in 2001, Thailand in 1997, Mexico in 1995. That’s what happens when re-sets in currency comes about — and, that’s what we’rte seeing in Hong Kong now — right before our eyes — and, it has just begun.”
What a great interview. I was glad to see Mr. Bass ‘school’ some of CNBC’s commentators, who have failed to appreciate or understand what is really at stake in these U.S./China trade negotiations. It is a whole lot more than a 1,000 point drop in the U.S. stock market. RCP, www.fortunascorner.com