Bass: China's Xi Has 'Built Economy On Foundation Of Sand"

Oct 26 2017 | 10:03pm ET

China will one day come to regret giving additional power to Chinese premier Xi Jinping at its recent party congress, according to famed hedge fund manager and long-time China bear Kyle Bass.

Bass, who has bet heavily against the Chinese yuan and has repeatedly warned about a looming collapse in the country’s banking system, said Xi will eventually be blamed for “recklessly building the Chinese economy on a foundation of sand,” according to a Bloomberg article citing an email from Bass Wednesday. 

Among Bass’s arguments is that truly developed economies do not severely restrict capital flow or manipulate their currency through overnight moves in short-term interest rates (although anyone on a currency desk when George Soros broke the Bank of England might remember otherwise). 

At its recently concluded 19th Party Congress, China promoted five new officials to help Xi as he enters his second five-year term. Importantly, no obvious successor was named, strongly suggesting Xi is already expected to serve a third term. The move essentially elevates Xi, who has embarked on a mission to turn China into a global superpower both economically and militarily, to the most powerful leader in the country since Mao. 

Bass, who runs Hayman Capital Management, has remained unimpressed by China’s progress in recent years, and asserted in February 2016 that the Chinese banking sector was “the world’s largest macro imbalance.” Since then, his bearishness on the country’s prospects has been strengthened by a growing pile of debt and a massively overleveraged corporate sector – to the tune of $40 trillion in debt against $2 trillion in equity, according to Bass. He has called for a 30% percent drop in the yuan. 

Bass founded Hayman in 2005 after stints at Bear Stearns and Legg Mason. He rose to prominence for correctly predicting the 2008 subprime crisis, and in addition to his macro plays, has gained notoriety since 2015 for a “short activist” effort challenging the patents on range of blockbuster drugs owned by various healthcare and biotech companies.

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