August 10, 2013

Kyle Bass is worried about China. Sees a full-scale recession in 2014

According to Hayman Capital’s letter, Kyle Bass is worried not only about Japan but also China. Kyle Bass expects a full-scale recession in China in 2014. He is taking risk down in the funds because he is worried about China according to investors’ letter sent in July. China problems probably mean bad news for asset prices worldwide. The credit expansion in China was huge in the last 5 years. The compounded annual growth of bank assets has been about 31%. If US banks did the same, it means 33 trillion USD in credit for 5 years. This rate is 3 times higher than what the US had the peak of the bubble in 2006. Kyle Bass is worried that easy liquidity from the PBOC will not be enough to keep growth because of diminishing marginal returns.

The debt to equity rations of Chinese firms are exploding as they funnel more capital, not into yield returning investments but to fill black holes on their balances. In the industrial sector, there is deflation as overcapacity is obvious.

"The speed and depth of the Chinese policy response will help determine the severity and duration of this crisis. If the Chinese address the issue quickly and move decisively to rein in credit expansion and accept a period of much lower growth, they may be able to use the government and People's Bank of China's balance sheet to cushion the adjustment in the economy," Kyle Bass wrote.

"If, however, they continue on the current path and allow this deterioration to reach its natural and logical limit, we will likely see a full-scale recession as well as a collapse in asset and real estate prices sometime next year."

The firm's flagship Hayman Capital Master Fund is up 16.73% this year through May, according to investor documents. Last year, the fund returned 16.66%, beating the benchmark. Hayman passed $2 billion in assets this spring; besides the main hedge fund and a fund focused on Japanese debt and currency. It seems Kyle Bass is doing well not only with his views but also his execution of trades.

Kyle Bass, an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market, before that market crashed. In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations.