LDN - Business

Kyle Bass still short yuan, says China credit bubble 'metastasizing'

[June 16, 2017] By Jennifer Ablan

NEW YORK (Reuters) - Hayman Capital Management founder Kyle Bass on Thursday said he remains short the Chinese yuan despite the country's latest change to the guidance rate, because he believes credit bubble problems are “metastasizing.”

“What the public narrative is and what they have been doing behind the scenes are two completely different stories,” Bass said in a telephone interview. “China has been masterful controlling the public narrative. As a fiduciary, I have no idea how anyone can invest in China.”

Famed for his successful bet against the U.S. housing market during the 2007-2009 global financial crisis, Bass said Hayman’s short position in the yuan, or renmimbi (RMB), is a “core” position and has “always been meaningful.”

Bass, who has long argued that the Chinese yuan is set to fall 30 percent against the U.S. dollar, identified fresh warning signs that China’s credit problems have spread.

These include how the five-year MTN yield, trading at 5 percent, has exceeded the bank loan rate, about 4.75 percent, for the first time, and that Moody's Investors Service recently downgraded China's credit ratings for the first time in nearly 30 years. Bass also highlighted concerns about China's capital controls and the country's shadow-banking system.

Indeed, CBRC vice-chairman Cao Yu said China established 12,836 creditor committees by the end of last year, to help manage credit of 14.85 trillion yuan. Bass said this amount represents 20 percent of the loans in Chinese banks, net of mortgages.

Bass said he believes non-performing loans at Chinese financial institutions are running at a 20 percent rate, not the 1.7 percent rate that has been widely reported.

“In fact, 14.85 trillion is more than all of the equity in the entire banking system,” he said. “The Chinese have masterfully swept all of this under the rug.”

As credit conditions have tightened in the world's second-largest economy, borrowing costs for companies have been rising. Banks are raising lending rates, including mortgage rates, and are wary of taking on more exposure to overheated sectors such as property. That trend will set the stage for a gradual slowdown in economic activity in coming months, analysts believe, though no one foresees a sharp decline as stability is the watchword ahead of a major political leadership reshuffle later this year.

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Kyle Bass, Chief Investment Officer of Hayman Capital Management, speaks at the Milken Institute Global Conference in Beverly Hills, California, U.S., May 4, 2016. REUTERS/Lucy Nicholson

Bass said China's Anbang Insurance Group, one of China's most aggressive buyers of overseas assets whose chairman has been detained by the police, illustrates China business risks.

"Anbang has raised money by selling high-yielding, high-risk, short-term life insurance policies with death benefits," Bass said. "They have the ultimate problem with extremely short-term liabilities funding very long-term assets. Anbang is just the beginning of a very large problem with asset-liabilty mismatches in China's financial system."

Bass noted that he has not always been a China bear and said China has been looking to force out one-way bearish bets on the yuan with second change this year in how the currency's guidance rate is calculated.

“This fixing mechanism throws a bit of unknown into the calculation,” he said.

Still, he said he was not throwing in the towel on his short position. “The PBOC wants you to do that," Bass said. "I don’t know how they can hold this all together. The numbers are telling me that we are right. The numbers are getting so bad so quickly.”

(Reporting By Jennifer Ablan; Editing by David Gregorio)

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