[CLIP] Kyle Bass: How China Built a Fake Economy | American Thought Leaders

I think I think it's important to think back to what drove the Chinese Miracle or the China miracle and uh if you look at how China financed itself and its GDP growth it was almost solely due to real estate speculation real estate prices rising local governments selling more real estate to fund their operating deficits and it was a it was a very procyclical cycle of rising values more speculation more sales from local governments and that created an economy where the average a Chinese citizen has 70% of of all of the Assets in China are invested in real estate uh and what that Miracle produced was meteoric reported GDP growth and all the concentric circles that surround it and you know you and I both know and those people that uh let's say follow China closely understand that the birth birth rate of the average Chinese female uh has dropped to 1.2 and it requires a birth rate of roughly 2.1 uh to sustain a population so we're seeing a pretty significant uh decline in the population and and um I think those two things are inextricably linked so if home prices got to be north of 20 times median home price to median income for instance and in the US and it subprime greatness we got to six times so China got over 20 times today is about 17 times in the tier one cities that means the Chinese men can't afford to buy new dwellings when they come out of University that then they're not having sex they're not marrying they're not having kids so the birth rate collapsed when Real Estate speculation got to its Zenith so you you know a couple of years ago Xi Jinping said uh that Financial Security is National security and if you note he he basically stopped uh real estate speculation because he he realized too late that it had created a real problem in the architecture of the Chinese economy so every single public real estate company developer in China is is in a state of bankruptcy today or default um and most of the private ones in the local government financing vehicle Market the market uh that either sold bonds or Bond money from Banks uh to to run their operating budgets outside of real estate sales uh that's a 13 trillion Market dollar equivalent Market in in Yuan and the majority of that Market's not paying in fact it got to a point in late October of 2023 where the pboc said in in our in our next set of Bank reviews any local government financing vehicle loans that are non-paying will be deemed to be paying um and it won't affect your bank rating that was a public statement the pboc made so when you look at what created China's Miracle it's now the exact opposite they've got almost 400% banking leverage to GDP they've got a scenario where they've got youth unemployment uh at a minimum of 25% and you know the the gray the gray Market says it's 40 to 50% of of Youth have can't find jobs and in a in a speech on New Year's Day xiin ping actually admitted that youth unemployment is a real problem he actually inexplicably decided to declare that China's economy is actually having problems and he declared that publicly and as you know they don't normally do things like that um so I think you have a scenario where real estate isn't going to bounce in China it can't uh XI jinping's got to get that ratio backed down to a number that allows population growth and again this is the unintended consequence of allowing a market to run unchecked um and so I think you're seeing a banking crisis you're clearly seeing a real estate crisis banks have a third to 45% of their Assets in Chinese and Hong Kong real estate loans so you've got the perfect economic storm hitting China at a point in time in which the geopolitical tensions in the world are at at a call it a multi-decade high so uh I think they're in real trouble well and I definitely want to talk about the implications of that but kind of but just before we go there okay for the you know lay person it may be difficult un to understand how an economy could grow the way the Chinese economy has grown over you know the last several decades um purely on real estate speculation I mean I I might add there's been some significant flows from the West right in terms of Western investment of a variety of sorts but but like can you just en capsulate that how does that how did that exactly work and how is it that that at the moment all of this is worth nothing all these companies are in default yeah I think that's a it's a great question when you think about China Inc you have to think about it in two spheres you have to think about their domestic marketplace where their banks are where their Capital markets are and how it operates with the with the RMB or the Yuan however you want to say it and that market is controlled by the state it's a state controlled operation as you know it's a totalitarian government um and they have they have their own uh version of capitalism with Chinese characteristics which we can get in we will get into what that means uh but the point being is they can control that Marketplace if they control their own currency printing because as you know they still have a closed Capital account with the world uh we give them the benefit of the doubt of the conversion of R&B at a spot rate into dollars and imagine if China were to abandon its uh great wall around its capital uh and they allow that the the average citizen in China to invest abroad to travel abroad uh and spend abroad um if they just open that capital account what would happen well the R&B would drop 40 or 50% and their GDP dollar terms would actually drop 40 or 50% you see what I'm saying we're giving them the benefit of a conversion rate of a contrived number uh because they have a closed Capital account so when you say how do they do it if you allow your R&B based Marketplace to grow unchecked in real estate and you plug the holes in the banks with more R&B uh you can create a significant domestic inflation number of assets which they did and then when they report GDP they take the R&B GDP number and convert it at a closed Capital account spot rate into the dollar and we give them the benefit of the doubt of of that conversion and we say wow you know in the last 15 years they've grown over 500% GDP in dollar terms well that's because they still have a closed Capital account and you mentioned that we've seen significant flows into China We Believe through the passive indices of the Leman Brothers Bloomberg aggregate Bond indices and the msci world Equity indices we believe there's $2 trillion dollar of passive capital in dollars that has gone into China again at that artificial rate so they grew a market unchecked in a speculative frenzy of real estate and reported GDP and then they they constructed a narrative around how you have to invest in China look at how fast we grow we're growing double digits every year you'd be stupid not to invest here uh and then dollars float in and that was the Chinese government's I.E uh kind of their way of becoming very influential on the world stage very quickly from an economic perspective when it was somewhat of a pkin village and we're seeing that now and again I know all this sounds like hyperbole but it's exactly what happened