Hayman Capital's Kyle Bass ventured on to CNBC this morning to drop some painful truth bombs about Trump's "drastically changed Chinese diplomacy" and China's looming "come-uppance." Bass began by highlighting what he calls a "tectonic shift" in US-China relations in the last few days, pointing to two crucial events...
1) Things changed drastically when US launched unilateral sanctions on China over North Korea. "Xi is a control freak and he absolutely doesn't appreciate the United States acting unilaterally"
2) Things escalated when Trump sold $1.4bn in weapons to Taiwan, angering Beijing more as Bass notes:
"Taiwan was the one area which Beijing has asked Trump to stay away from during his meeting at Mar-a-Lago. Since the death of Otto Warmbier, any chance of meetings with North Korea are now off.. and our diplomatic relationship with China took a major step for the worse yesterday."
Bass notes that "China is trying to make marginal changes in its balance of trade with US - buying beef once again and importing a lot more crude oil from the US."
# But then Bass shifts to the potentially even more precarious situation under the hood of China's economy. As Reuters reports, China's leaders want the restructuring of their massive non-performing loans problem to address financial risks while avoiding big employee lay-offs, and have instigated 'cure by committee';.
"The solution for zombie firms isn't just bankruptcy," a Shandong-based banking official told Reuters. "The impact of bankruptcy is just too big. Just think about the thousands of workers. Social stability is key."
Stability is always uppermost in the minds of Chinese leaders, and even more so this year, ahead of the five-yearly party congress this autumn, when a new generation of senior leaders will be selected.
"China is avoiding the crisis of calling in loans that can't be repaid anyway," said Paul Gillis, professor of accounting at Peking University's Guanghua School of Management. "This buys time to do things in an orderly way."
# But Bass makes the crucial point that there are over 12,800 credit committees in China right now, overseeing CNY 14.5 trillion in debt for equity swaps - which is 8% of China's total non financial debt, and is over 3x the official NPL figure of 1.6%-1.9% of GDP.
His final blow to any hopes that this solution will work.
"This exceeds all the equity in the entire Chinese banking system."
However, Bass's final warning of the endgame of this credit bubble is far more ominous, because all of the new-found economic confidence and military condidence is "based upon a massive credit expansion and they're going to have a comeuppance"....