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Published: May 13, 2020 at 10:45 a.m. ET, By Chris Matthews<\/p>\n
Kyle Bass made his name betting against the U.S. housing market more than a decade ago, and today he is predicting an economic contraction that could be more than three times as severe as that suffered during the Great Financial Crisis.<\/p>\n
\u201cFor the year I think you\u2019re going to see U.S. GDP down somewhere between 7% to 10% in real terms,\u201d as a result of the COVID-19 pandemic and the government\u2019s efforts to contain the spread of the virus with business shutdowns, and \u201c10% is an economic depression,\u201d said the founder of hedge fund Hayman Capital Management, in an interview.<\/p>\n
Indeed, the last time the U.S. economy contracted on an annual basis was during the financial crisis in 2009, when it shrank by 2.5%. The last time it shrank by more than 10% was in 1946 at the end of World War II. Prior to that the U.S. economy shrank by 12.9% in 1932, at the height of the Great Depression.<\/p>\n
China\u2019s woes<\/strong><\/p>\n Bass said the economic fallout in China could be even more severe, laying bare what he sees as a desperate shortage of U.S. dollars in the Chinese economy at a time when the Chinese Communist Party is beating back a political crisis in Hong Kong, a key conduit of foreign capital.<\/p>\n Bass argued that the Chinese economy has evolved in several fundamental ways over the past decade as wages for its workers have risen, making Chinese exporters less competitive relative to rivals in countries including Vietnam and Mexico. Meanwhile fears about the health of the Chinese economy, which has required ever greater debt loads to fuel ever lower levels of economic growth, have led wealthy Chinese citizens to try to move money abroad to jurisdictions that protect against government expropriation.<\/p>\n This behavior peaked in 2016, when a worrying decline in China\u2019s foreign-exchange reserves led the government to impose strict controls on moving funds out of the economy. At the same time, Chinese companies have taken on increasing levels of dollar-denominated debt to enable their purchases of foreign commodities like oil and agricultural products.<\/p>\n \u201cThey are starting to look like a traditional emerging market, with a closed capital account and huge dollar-based borrowing,\u201d Bass said. China\u2019s four largest banks<\/a> \u201cin the last two years switched from huge dollar-based asset surpluses to now they have dollar-based deficits across the board.\u201d<\/p>\n While the coronavirus pandemic will cause untold damage to the global economy, Bass hopes that it will help focus Americans\u2019 minds on the unsustainability of the U.S.-China economic relationship, as American efforts to combat the disease have been hampered by an overreliance on Chinese and other foreign sources for key medical equipment and pharmaceuticals.<\/p>\n See: Here\u2019s what China\u2019s coronavirus shutdown did to global supply chains<\/a><\/p>\n \n\u2018Anyone that comes here to raise U.S. dollars selling stocks or bonds, just make them adhere to the exact same standards as U.S. companies.\u2019\u2014 Kyle Bass\n<\/p><\/blockquote>\n He said the U.S. government should aid companies in efforts to bring critical supply chains back within U.S. borders and should continue to discourage American investment in Chinese firms, as the Trump administration recently did when it restricted a federal pension fund\u2019s capacity to invest in Chinese securities<\/a>.<\/p>\n Bass said the U.S. should go further and bar Chinese companies from raising money from the U.S., unless it submits to U.S. securities laws, including thorough audits that Chinese firms have avoided since U.S. and Chinese regulators signed a memorandum of understanding in 2013 exempting Chinese firms from those procedures.<\/p>\n \u201cAnyone that comes here to raise U.S. dollars selling stocks or bonds, just make them adhere to the exact same standards as U.S. companies,\u201d Bass said.<\/p>\n See: U.S.-China relations are bad and getting worse, with major ramifications for trade and investment \u2014 and the U.S.\u2019s presidential election<\/a><\/p>\n Opinion: Luckin Coffee highlights the risks of Chinese IPOs, but investors are not getting the message<\/a><\/p>\n A new Cold War<\/strong><\/p>\n The U.S. and other Western democracies may be forced to confront China more forcefully as a political crisis in Hong Kong continues to brew. Pro-democracy protests have re-emerged in the city<\/a> as residents there bristle against increased interference by Beijing in its affairs, with recent catalysts being restrictions against public gatherings<\/a> of more than eight people that the government has said is necessary to combat coronavirus.<\/p>\n Pro-democracy advocates worry<\/a> that Beijing will use the epidemic as a pretext for postponing contests for the 70-seat Legislative Council set for September as arrests and police actions have risen.<\/p>\n \u201cThe crucible of this ideological divide between Marxist-Leninist socialism with Chinese characteristics and Western democracy is Hong Kong,\u201d Bass said. \u201cHong Kong is going to be the financial laboratory in the experiment between those two ideologies and what will happen when they come to an impasse.\u201d<\/p>\n Though Bass said he has exited previous bets against the China\u2019s currency, the renminbi, to avoid the impression that he was promoting a hard line on China for personal profit, he does see a potential for investors to gain by betting against Hong Kong\u2019s banking system. \u201cThe Hong Kong banks are completely insolvent,\u201d he said. \u201cVery much like U.S. banks were during the financial crisis, except it\u2019s eight times worse.\u201d<\/p>\n The aftermath in the U.S.<\/strong><\/p>\n While Bass is hopeful that the current crisis will focus American policy makers on reforming the U.S. relationship with China, he remains fearful of declining social cohesion here at home.<\/p>\n \u201cI give the Fed an A-plus for using the tools they had at their disposal to combat this sinister virus. They fought it beautifully,\u201d he said, but he worried that the scale of the central bank\u2019s response will \u201csupercharge\u201d growth in income inequality.<\/p>\n \n\u2018I give the Fed an A-plus for using the tools they had at their disposal to combat this sinister virus. They fought it beautifully.\u2019\u2014 Kyle Bass\n<\/p><\/blockquote>\n Since the Federal Reserve announced a massive new commitment to buy a wide range of assets in late March, bond and equity markets have rallied, with the Dow Jones Industrial Average DJIA, S&P 500 SPX and Nasdaq Composite COMP all recovering more than 25% from their coronavirus-crisis lows.<\/p>\n![\"The](\"https:\/\/www.maxlee.info\/blog\/wp-content\/uploads\/2020\/05\/MW-IG393_chinad_20200513073202_NS.jpg\")
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