The man who cleaned up during the GFC reckons another financial crisis is on the way

Photo: Dan Kitwood/Getty Images

Well known US hedge fund manager Kyle Bass believes the day of reckoning for China’s banking system may be only “months away”.

During an interview with CNBC, Bass suggested too few investors were paying attention to signs of stress in China’s banking system, warning that after growing to US$34.5 trillion, or more than three times GDP in recent years, a wave of defaults may be about to hit the financial system.

Bass cited a raft of concerns about the current state of the Chinese economy, pointing to a sharp deceleration in industrial production and the lowest nominal quarterly GDP growth reading seen in 40 years.

“This isn’t an aberration. This isn’t a speed bump. This is China’s excess — let’s call it misallocation of capital — coming home to roost,” Bass told CNBC.

“You can’t grow your banking system 1,000% in 10 years and not have a loss cycle. And your currency won’t stay strong when you go to rectify that balance.”

Bass, like others, is betting that the PBOC will be forced to weaken its currency, selling down a proportion of its vast foreign exchange reserves to recapitalise the nation’s banking system.

With capital outflows already accelerating, he believes that China’s FX reserves – totalling US$3.3 trillion at present – will fall to as just US$2.7 trillion in the months ahead, triggering concern about potential financial instability.

“They’ll hit that number in the next five months,” Bass told CNBC.

“Those that think they can burn it to zero and they have many years ahead of them, they really only have a few months ahead of them before they get into a real danger territory.”

Should Bass’s call turn out to be correct, he believes the yuan will weaken substantially. He describes a 10% depreciation – a figure already at the extremes of current market forecasts – as “a pipe dream”.

“When you look at the size of the imbalance and the size of their economy, it’s going to go 30 or 40 percent in the end, and it’s going to be the reset for the world.”

Bass came to prominence during and after the global financial crisis, correctly predicting – and acting upon – the collapse of the U.S. sub-prime mortgage market.

His views on the currency are unlikely to go unnoticed by China’s state-run media, at least based on recent form.

Last week they launched a stinging attack on another famous hedge fund manager, George Soros, after it was incorrectly reported that he was shorting the Chinese yuan.

A story in the People’s Daily newspaper entitled “Declaring war on China’s currency? Ha ha” went viral across financial markets with the newspaper suggesting that “Soros’ war on the renminbi and the Hong Kong dollar cannot possibly succeed — about this there can be no doubt”.

After such specific commentary from another high profile money manager, one can only wonder what headline they’ll come up with next.

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