China's economy is 'circling the drain' and you can't make money investing in a totalitarian government, investment chief says

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China’s economy is ‘circling the drain,” Kyle Bass said.REUTERS/Bobby Yip

  • China’s economy is “circling the drain” and investors can’t make money in the long-term there, Hayman Capital’s Kyle Bass said.

  • The investment chief pointed to China’s weak real estate and offshore bond market.

  • “What I’m trying to remind everyone is you don’t make anything investing in a totalitarian government over a long period of time.”

The founder and chief investment officer of Hayman Capital Management isn’t bullish on China, and economic and political reasons underpin his long-term bearish outlook on the world’s second-largest economy.

“I’m trying to be a realist about, are you going to make money investing in China in the long run? Or is it going to be the Chinese Communist Party?” Kyle Bass said in an interview with Bloomberg on Monday. “What I’m trying to remind everyone is you don’t make anything investing in a totalitarian government over a long period of time. You say it’s negativity, I say it’s realism.”

In recent months, a slate of downbeat data has come out of China, and there has been no sight of the vaunted pandemic rebound many had expected.

Trouble is growing particularly in China’s real estate sector. Massive property developers like Evergrande and Country Garden Holdings have teetered on the brink of default, and it’s led some commentators to float the idea of a “Lehman moment” for the country’s financial system.

Amid the constant flow of negative data, officials announced this summer that the government would no longer publish certain statistic, such as youth employment, which is has soared in recent years.

“You have the Chinese government trying to muscle their currency stronger, when in the long run you’ve got the Chinese economy circling the drain, you have the real estate market falling apart,” Bass said. “Every single private developer is in some stage of bankruptcy today. And you’ve got about $190 billion worth of offshore bonds, dollar bonds, in some sense of default.”

The daily, incremental moves coming out of China are less important than the big picture, he maintained. The system and politics of China make it an unattractive long-term choice for portfolio allocations, in his view.

“I just think you don’t want to invest,” he said. “I think you want to invest in markets where there’s a rule of law, and where you have real leadership, and you actually have ways to earn returns that are positive for your portfolio.”

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