If you have more than a passing interest in China no doubt somebody has brought to your attention a recent letter from Mr. Kyle Bass to investors in his fund Hayman Capital Management? [A friend sent me the link to the full text posted at ValueWalk which you can access here Kyle Bass Letter]
Sticking it to China seems to be a popular trade presently and others such as Mr. George Soros, Mr. Stanley Druckenmiller and Mr. David Einhorn have all reportedly placed bets against China in one form or another. These are smart managers placing money and reputation on the line; so it’d be dangerous to take an opposing view. Right?
I don’t want to take on individual arguments head-on but to address the issue in general and Mr. Bass’s letter specifically here is my own two-pennyworth which I hope can supply a little balance to a debate that appears presently very lopsided.
In Mr. Bass’s letter, to take each half-truth, wobbly non-log chart and unattributed quote to pieces would be a boring and pointless exercise. I’m reminded here of the famous Dr. Johnson story about reality being more important than solipsistic self serving arguments.
After we came out of the church, we stood talking for some time together of Bishop Berkeley’s ingenious sophistry to prove the nonexistence of matter, and that every thing in the universe is merely ideal. I observed, that though we are satisfied his doctrine is not true, it is impossible to refute it. I never shall forget the alacrity with which Johnson answered, striking his foot with mighty force against a large stone, till he rebounded from it — “I refute it thus.” Boswell: Life
China has recognized a need to re-balance its economy and begun the process. It hasn’t waited for a crisis to tell it this is necessary. It’s closing steel capacity, has closed hundreds of coal mines, has restricted new cement and glass production facilities for the last three years (to my certain and first hand knowledge) and it instigated a strong-Rmb policy some time ago. It doesn’t want to be cheap or to have a Plaza-Accord forced on it.
The letter from Mr. Bass contains a tired list of things that China’s supposed to be guilty of and I’ll wager that Mr. Bass has never paid a visit, never talked to a manager of an SOE or consulted even the most accessible Beijing policy wonks? That credit growth got a bit out of hand is a problem inherited from the 2008 stimulus and now firmly back in the bottle and Fitch (noisy among many others) have been banging on about the ‘secret’ credit problems in China for several years (remember Ms. Charlene Chu’s work? Charlene From 2013).
In summary, don’t lose sight of Mr. Bass’s agenda. He’s not sharing thoughts for his own amusement. His letter is the same diet of self serving (and, as its turned out, incorrect) noise promoted with equal verve by Mr. Jim ‘Dubai-Times-1000’ Chanos in 2010. Does China have problems? Sure. Do America, Europe, Latam, the Middle East have problems? Er..
The difference in China’s case is, and will remain, the fact that the government is fully aware of issues and in all cases, as far as we can make out, on to them. Nobody in Beijing is going to read Mr. Bass’s letter and go ‘Holy-Cow!! Who knew?’ Crises occur where you’re not looking and China’s financial and economic system has got to be one of the most closely scrutinized on the planet; and, at home, by some of the finest minds on this same planet.
The jabs of yet another U.S. manager with a clear agenda and a strong partisan argument are not going to go away; but neither is China going up in a puff of smoke anytime soon (Mr. Bass has also predicted a collapse of Japan for some time). Throw enough poop at something though and some will stick.
The argument will never be settled and on down days the media will find the necessary stories to ex post explain why what’s happening is happening and in this process Mr. Bass, and his friends, are the other hand washing the media’s always news-needy paw.
As China matures, as its institutions become more complex and as it increasingly plugs into a global marketplace where events will occur often beyond its control its systems will be tested. Of this I have no doubt. Will it however be stressed at a convenient time for noisy short sellers to walk away with large I-told-you-so gains? Of this I am very doubtful.