Kyle Bass Hayman Market China Analysis
http://www.scribd.com/mobile/doc/298922249/Hayman-Market-Commentary-on-China-February-2016
Hayman Market Commentary on China - February 2016
12 pages
February 10, 2016
The $34 Trillion Experiment: China’s Banking System and
the
World’s
Largest Macro Imbalance
Dear Investors, Over the past decade, we have worked diligently to identify anomalies in financial systems, governments, and companies around the world. We have been vigorously studying China over the last year, with the view that the rapid credit expansion in the Chinese banking system will result in significant credit losses that will require the recapitalization of Chinese banks and materially pressure the Chinese currency. This outcome will have many near-term and long-term effects on countries and markets around the world. In other words, what happens in China will not stay in China. The unwavering faith that the Chinese will somehow be able to successfully avoid anything more severe than a moderate economic slowdown by continuing to rely on the perpetual expansion of credit reminds us of the belief in 2006 that US home prices would never decline. Similar to the US banking system in its approach to the Global Financial Crisis
(“GFCâ€), China’s banking system has increasingly
pursued excessive leverage, regulatory arbitrage, and irresponsible risk taking. Recently, we have had numerous discussions with various Wall Street firms, consultants, and other respected China experts, and they almost all share the view that China will pull through without a reset of its economic conditions. What we have come to realize through these discussions is that many have come to their conclusion without fully appreciating the size of the Chinese banking system and the composition of assets at individual banks. More importantly, banking system losses -
which could exceed 400% of the US banking losses incurred during the subprime crisis
- are starting to accelerate. Our research suggests that China does not have the financial arsenal to continue on without restructuring many of its banks and undergoing a large devaluation of its currency. It is normal for economies and markets to experience cycles, and a near-term downturn that works to correct the
current economic imbalances does not qualitatively change China’s
longer-term growth outlook and transition to a service economy. However, credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world. What we are witnessing is the resetting of the largest macro imbalance the world has ever seen.
“Chinese banking system losses could exceed 400% of the US banking losses incurred during the subprime crisis.”