Over the weekend I read Boomerang by Michael Lewis and noticed that the opening chapters profile Kyle Bass, who these days is mostly known for his huge bear stance on the yuan/renminbi. In the book he's profiled for being one of the people to take advantage of the 2008 global crisis, as well as correctly noting the subsequent banking/credit crises of Iceland, Ireland, and Greece.

The letter he wrote in Feb 16 is linked here.

Since the time he wrote it, most China bears are feeling the pain. Bass is steadfast in his position and gives a timeframe of November 2017 to June 2018 as a target for the Yuan to finally get hit.

It doesn't do a whole lot of good for me to lay out the points of the Bass letter here in print, but some noteworthy things to me:

- Credit system has grown from 3 trillion in 2006 to around 40 trillion today.

- Bass estimates that against the 40 trillion in assets lies about 2 trillion in bank reserves. Bass also estimates that banking system losses could exceed 400% of the US banking losses incurred during subprime.

- 19th National Congress (convenes once every 5 years) opens October 18th and lasts a week.

- PBOC has cracked down on overseas acquisitions and has forced multinational companies $ to stay in China.

- PBOC is now cracking down on crypto, freezing exchanges. To what extent is this controlling yuan outflows versus manipulating crypto is yet to be totally seen, but there's a real chance as of this writing that they could outright ban all of crypto as well.

- 100 out of 180 countries have China as their biggest trading partner.

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I am wondering how people are looking at this given that there's not a lot of convenient ways to get exposed to China.

- What kind of equity pullback could be expected with chinese bank failures and a credit crisis?

- How much would the Yuan have to depreciate to stem the tide?

- Could there be a geopolitical situation in China and a call for government overhaul?

- Could this introduce some kind of contagion with developing Chinese trade partners? What business sectors are most likely affected?

Just looking for general comments, I expect there are some people who think nothing will happen and I look forward to their opinion. I am feeling pretty tinfoil on this.

So this happened and the stock gained nearly 10% today.

https://www.bloomberg.com/news/artic...-from-huarong?

It's total insanity. MCHI puts ftw?

sunac's chart is pretty lol

Interesting. Like many, my following of the concerns with China's credit/banking has been only loose at best. Thanks for mentioning the Kyle Bass piece; didn't realize he had a super strong position/conviction.

I thought this recent piece by GMO was a good read; doesn't really give any answers/opinions regarding questions in the OP, but I think it's a good background overview:

https://www.gmo.com/docs/default-sou...s.pdf?sfvrsn=2

Bass is a macro tourist. I liked him at first, but his China argument is pretty dishonest. And I think he misses some crucial points on Japan too.

One thing he did not mention is that about 40% of China's total debt load is between state banks and SOE's. This amounts to about 100% of GDP. This is because the Chinese hate doing QE, so in 2009 instead of printing like the rest of the world, they ordered state banks to loan a ton of money to state owned enterprises. And now they have to deal with this.

Why is this not as bad as everyone thinks it is? Well Chinese GDP/capita is only $7k vs US of $58k, so plenty of easy growth left to grow out of it. And it is basically one hand loaning money to the other hand. Since it is internal they can relatively easily restructure it. Do some QE, extend maturities, let some of them fall, debt/equity swaps etc.

Does this mean there are no problems? There might some hiccups in the short term, but if they handle this rationally it should not really be a big deal in the long term. And they got a history of handling things like this rationally.

This guy has made a good macro call or two (predicting 2009 mess as well) and he is investing big in China now:
https://www.cnbc.com/2017/09/10/ray-...hina-fund.html

Wrote article with more details here:
https://seekingalpha.com/article/408...mics-investing

he's been predicting collapse of chinese credit system for years and also called for the collapse of JGBs. not that china collapse won't happen, but if you predict the collapse of enough things long enough you'll be right some of the time and look like a genius if you're not held to your wrong calls

China's GDP are all made up bull****. A trip to Shenzhen can tell you that.

I am amazed how he claim China can keep these economic growth when now it becomes a hellhole already. Check http://aqicn.org and see how polluted it is.

I think the numbers might be padded somewhat, but they are mostly true.

http://media.unwto.org/press-release...ng-abroad-2016

135 million Chinese travelling abroad and spending increasing 12%, those statistics don't lie.

This documentary is pretty interesting:
https://youtu.be/SGJ5cZnoodY

Also pollution does not mean a country is poor. If anything it means they are getting richer.

Mexico's GDP per capita is $10k, so almost 50% higher than China. Mexico city's GDP per capita is $20k, and they are choking in smog. Something to keep in mind imo.

GDP are all lies. You build stuff and then have someone you control buy them at a huge mark up. You hear ghost town?

If you want high GDP you can also spam useless airports and rails. These contribute to the GDP but is a net negative to the society as a whole. China is not even a ****ing free market so I don't know why they like to number crunch like they can predict this country will do well or not.

As for the increased spending of Chinese tourists, this is actually a positive to other nations and negative to China. Why do you think it is a good thing?
China is rich only in the sense that they have a lot of money, but they can't do jack **** with it. They can buy obsolete tech from other nations (even Russia won't give some of their jet engine), but key tech will be closely guarded. This is also why China buy so much US treasury bonds.

I made a point about air pollution because it demonstrate how much a hellhole China is, and it is easily verifiable. How about other factors regarding the quality of life?

If you were top talent in MIT do you want to go back to China?

The richest man in Hong Kong is unwinding his position in China
http://www.scmp.com/business/compani...becomes-cheung

The China/Hong Kong stock market are low p/e ( I won't call this cheap) for a reason.

Who buys it? Also in most of these ghost towns actual people are living there now.
Most of those airports are not useless, industries are build around them. ALso lol at China not having free markets, some places are like libertarian dreams. Watch that Shenzhen docu. And if what you say is true, their money is useless. Yet they managed to build up a forex reserve of $3 trillion. Chinese people come from China to spend money in the west, and the Yuan has increased in value against the dollar despite printing trillions of $:


Because that money has to come from somewhere. Also if you have ever been to China you see they have built up massive infrastructure and are basically the factory of the world.

And they buy treasury bonds because they want to keep their currency cheap for exports (create more supply of yuan), this is basic economics dude. If their economy is such a giant fraud, why on earth would they do that? It would only let their currency collapse faster if that was the case.
Yeah but it has zero to do with whether or not GDP is inflated or deflated. So not sure why you bring that up.
Actually they are going back to China:
https://www.forbes.com/sites/kenrapo.../#2c52e8f91d41


The Chinese stock market is not that cheap. Shanghai trades at 17x PE despite having a lot of low quality stocks, Shenzhen trades at 37x PE. Despite having pretty low quality stocks in them.

HK exchange is the one that is cheap at 11x PE.

The whole fraud argument has been spun for like 10-15 years now. Lot's of private organizations have collected data in China, so if it was a fraud there would be convincing evidence by now. Yet one of the largest private organizations who collect data themselves have decided to bet big on China. That should tell you something.

This is the primary thing I'm trying to grasp, because as I see it the Chinese aren't exactly transparent on how this happens and how much of a toxic debt load comes as a result of it.

It reminds me of Ireland the way that the banks become overexposed to a bubbling real estate market, and it reminds me of Greece the way that I presume there is just rampant corruption and lying going on with the data.

That said, it seems like the government can control this very easily, but I'm not sure how easy that is when you go from 3 trillion to 36 trillion in a decade.

The government is not the only one collecting data in China. Anyone can book a plane ticket and simply ask around and collect data. NGO's, large hedge funds etc collect data independently. And that roughly matches up with Chinese government data. Satellites can be used to measure the amount of night lights from cities which is a pretty good indicator.

This is a good article:
http://libertystreeteconomics.newyor...verstated.html

And this one:
https://www.stlouisfed.org/publicati...ke-and-mirrors

It is completely impossible that the data has been inflated by more than a few %, because you would have seen it in the night lights and import/export data (which cannot be falsified by Chinese government).

Their economy also did not grow from 3 to 36 trillion in a decade, but from $3.5 to about $11 trillion.

Read a paper a while ago with independent data about house prices and incomes, I will see if I can find it.

Here is an article about the ghost cities

"In the end, only government officials and migrant construction workers effectively settled in," Olivier said, "leaving the vast majority of the city completely empty."

Though the city is only about one-third full, 80% to 90% of unoccupied apartments have owners, who hold on to them as long-term investments, Forbes reported in 2016.

Some of the ghost cities have people moving in due to government subsidies and tax breaks. This implies the actual utility value of these building is lower then what they sell for. However when counting for GDP this count for full value.

The same applies when the riches buy properties for "investment" purpose in other areas. Just bought them up, no one live in it, waste of resources.

I will give you that.

libertarian dreams only if you have connection, aka guanxi. See how Jack Ma steal Alipay from yahoo. If you don't have guanxi there are tons of regulation to follow.

China earned tons of money with her massive export. I already said that.
Yes she is the factory of the world.
You are implying in your post that because China have a lot of money their economy will grow. What the Chinese government do is the exact opposite of helping the economy grow: Put the hard earned money in US.

basic economics: You have to keep price low only when your products are not competitive. Not exactly what I want when I invest. I would change my view if they can produce products with huge margin. Where is the luxury brand in China?

I am not saying their economy is fraud. However I am not going to invest in a country where the government can restrict capital outflow, and their citizens are trying their best to outwit the government and spend their hard earned money outside of said country.

For an economy to prosper, the standard of living of the people must be improving, not deteriorating. Especially when in the modern age in which technology is the key to economic growth. All the countries are trying to attract talents, and said talents will of cause pick a country where they can have high standard of living. Do you think a country with poor air quality, unsafe food and limited freedom can attract talents? You know, a country in which the government dictate how many Children you can have.

Or you can build more factories, but this will not end up well when now some of the place become so polluted that it is already inhabitable.

Also GDP growth != corporate earning growth != Propsperity
Sorry in my last post I sound like my point is fake GDP figures, that is not my point.

From the linked article.
I am referring to the guys who are ultra smart, the main contributor of tech progress, not rich kids who were sent to US by rich parents.
Not enough work visa for everyone. Tens of thousands of students vs 20,000 H1-B visa.
You have no choice but to go back is different from you actually want to go back.


I think now it is 15x p/e? Again not cheap in my standard.

Wall street firms rarely have the same opinion. I am sure there are firms who have shorted China.
Death threats, so I suppose I will just stay out of my way.
http://www.businessinsider.com/r-as-...-mounts-2017-8

I am neither short or long

Everyone and their mothers knows about those ghost cities. See the links posted above. Unofficial data roughly matches up with official data. It is not exactly some obscure thing that few know about.

China was responsible for like 50% of global solar sales last year btw. They have a spending plan of $350 billion for the next few years, which is 3% of their GDP to upgrade their grid so that large amounts of energy can be sent from the sunny parts of China. Give it 10-15 years and a lot of that pollution will be gone.

This is pretty standard for an economy like China's. Capital controls happened to almost every developing country before they became rich. Countries with larger rural populations are generally more unstable, and this is often done for stability. Once like 70% lives in a city, and financial markets are more developed they will let their currency float freely.

That is not how that works. Brazil did this and it put a major plug in growth. Development is usually not evenly spread out. You have area's with $15-20k of GDP per capita, and you have area's with $1-3k per capita. Urbanization in China is only 55%. What they try to do with keeping their currency low is making it easier for those poor areas to develop with cheap exports. See for example Xinjiang.

Also incentivizing people to live in cities is not necessarily a bad idea, there is a major network effect, if more people live there it becomes more attractive to live there.
You are missing the point here. Their GDP per capita is only about $7k. If it goes to $9k within a few years, they will still be an undeveloped country, but you will likely do well if you invest in cheap local companies. This would be a good argument if their GDP per capita was like $20k or so.

Here is a list of luxury brands, China is in there several times:
https://www2.deloitte.com/content/da...uxury-2017.pdf

Yet Mexico isn't in there once, and their GDP per capita is 50% higher.

You mean like this guy:
https://www.economist.com/news/speci...use-innovation
This is Bridgewater, not some hacky firm that underperformed the S&P 500. These guys collect their own data, and he predicted the 2009 crisis.

China still has a bit to go but it has done a LOT to professionalize government services in last 15 years or so, especially under Xi Jiping.

The debt load is a symptom of a bigger problem: political infighting on how to get rid of a politically embedded industry (coal namely). The amount of toxic loans, while large, is not going to collapse the banks or the financial system. Largely because the government controls both the creditors and debtors so the probability of a disorderly unwinding of positions is very low.

Re: top grad from MIT going to China.
The answer is yes. Many top grads from top American universities are going back to China. A lot of them are doing so involuntarily due to losing out on H1B lottery. Others are going back because they don't want to deal with bamboo ceiling.

Nice call on Sunac, calmasahinducow.

https://www.bloomberg.com/news/artic...witter-markets

"Six of the 10 best performers on the MSCI All-Country World Index in the one month through Sept. 21 were Chinese real estate firms. Chinese developers had their biggest slump in six years on Monday, before some rebounded on Tuesday."

SUNAC down to 31 from 36 when initially posted

bloomberg sure is coming out with a lot of hot chinese takes lately

Economist Xie Says China's Property Market a Ponzi Scheme

Regarding improving legal system in china:
https://www.economist.com/news/china...ome-plaintiffs

conclusion of article:

https://www.bloomberg.com/news/artic...are-commentary

another one related to that i saw today

https://www.bloomberg.com/news/artic...least-on-paper

China to Allow Foreign Firms to Own 51% of Securities Joint Ventures

Another warning sign afaik

bump

interesting ZH koolaid article on current status of china's housing complex.

most of what i get out of it are the people who are like 50% offsides on their condo purchases from a year or two ago.

https://www.zerohedge.com/news/2018-...e-worried-time

Big bets on the collapse of China’s indebted economy have largely failed. Did the hedge funds misread the signs or were they just too early?

bump

talk about a pain trade



Trump's Trade War Sinks China's Yuan Most Since 2015 Devaluation

Chinese firms slow to reduce share-backed loans despite regulator crackdown

The idea of a massive wave of margin calls due to loans being backed by stocks seems like kerosene on a market atomic bomb

called the top #savant