Hedge fund manager and Hayman Capital Management founder Kyle Bass said on Monday that without state support, China’s currency would plunge.
“What’s happening in China is they have to have dollars to sell to buy their own currency to hold it up. If they were to ever free float their currency, I think it would drop 30% or 40%,” Bass told CNBC’s “Closing Bell.”
“And the reason is they claim to be 15% of global GDP in dollar terms, but less than 1% of global transactions settled in their own currency,” Bass added. “And so, they prop their currency up…everyone calling them a currency manipulator – they are trying to hold this whole thing together.”
Bass’s comments came after the Chinese yuan crossed a closely watched barrier against the U.S. dollar. The onshore Chinese yuan changed hands above 7 against the dollar, the currency’s weakest levels against the greenback since 2008.
The new lows for the yuan came after U.S. President Donald Trump unexpectedly announced fresh tariffs on Beijing last week that are set to take effect from Sept. 1. China on Monday said it could slap tariffs on U.S. agricultural goods that it bought recently, state-run media Xinhua reported.
Will a Currency Crisis Bring Down China? (w/ Kyle Bass & Raoul Pal)
Hayman Capital founder and CIO Kyle Bass is back. In this riveting conversation, he tells Raoul Pal exactly how, why, and when China’s economy will come unraveled. As China’s growth declines, Bass says that its currency is at the heart of a coming crisis. And with growth rates everywhere decelerating, he believes his China thesis is as relevant an investment thesis as any. Filmed on February 12, 2019 in New York.
Why China Won’t Yield to Trump
China may give Donald Trump some face-saving way out from the trade war he has started, but it won’t offer any substantive concessions. In other words, Trump’s tariffs will do nothing to improve America’s external balance, output, employment, or real wages. .. some defend Trump’s actions as a shrewd negotiating tactic to impel China to adjust its trade policies, such as the requirement that foreign companies share their intellectual property (IP) to gain access to the Chinese market.
.. Trump does not understand the basics of such a negotiation: he thinks that a country with a trade deficit necessarily has the stronger negotiating position. In reality, the surplus country is often in the stronger position, because it has accumulated financial claims against its “opponent.”
.. China does not necessarily even have to sell to wield influence. With US debt expanding and interest rates on the rise, even rumors that the Chinese might stop buying Treasury securities could be enough to drive down US bond prices and accelerate the increase in US interest rates.
.. While industries and consumers in China would also be hurt by a trade war, that country’s leaders can overrule interest groups and stifle protests.
In any case, public opinion will largely back retaliation against the US.
.. The Chinese remember well the Opium Wars of the nineteenth century, when the Middle Kingdom tried and failed to resist the British campaign to force it to open its economy to opium and other imports.
.. Add to that Trump’s reputation for flip-flopping, and the odds that Chinese leaders would bother making a deal with Trump to change their country’s trade policies seem small.
.. Even if China did decide to concede something to Trump, it would not be meaningful.
.. China could export less merchandise to the US directly, instead routing products through Taiwan and other countries, where some final assembly could take place.
.. The result would be economically meaningless; but so is the concept of the bilateral deficit itself, as Chinese exports to the US contain a high proportion of intermediate inputs produced in South Korea, the US, and elsewhere.
.. What really matters is that China’s current-account surplushas been falling since 2008, and now stands at a relatively small 1% of GDP.
.. America’s external deficit is growing, but that is the result not of trade policy; it stems from Republicans’ fiscal policy, which is blowing up the budget deficit and reducing national saving.
.. As for Trump’s complaints about China’s IP “theft,” there are some valid grievances on this front. But addressing this issue requires technical expertise and negotiating skill, not blunt threats based on inadequate knowledge.
Crucially, it would also require cooperation with other partners who have similar grievances with China, ideally including pressure applied through rules-based institutions like the World Trade Organization.
Trump is pursuing the opposite strategy, arguing that neither multilateralism nor bilateral negotiations work with China. Yet such tactics have helped to compel China to allow a 37% appreciation of the renminbi in 2004-2014 and to crack down on counterfeiting of US merchandise and theft of US software.
.. Trump may also want to avoid the WTO because the US doesn’t win all of the cases it brings there. But it does have a 90% success rate. And it is not as if the US has never violated international rules
Trump’s Trade Confusion
Trump himself has already undercut his national-security claim by exempting most major exporters of steel to the US. Canada, for example, is exempted on the condition of a successful renegotiation of the North American Free Trade Agreement,
.. effectively threatening the country unless it gives into US demands.
But there are a host of issues in contention, involving, for example, lumber, milk, and cars. Is Trump really suggesting that the US would sacrifice national security for a better agreement on these minor irritants in US-Canadian trade? Or perhaps the national-security claim is fundamentally bogus, as Trump’s secretary of defense has suggested, and Trump, as muddled as he is on most issues, realizes this.
.. As is often the case, Trump seems to be fixated on a bygone problem.
- .. Recall that, by the time Trump began talking about his border wall, immigration from Mexico had already dwindled to near zero.
- And by the time he started complaining about China depressing its currency’s exchange rate, the Chinese government was in fact propping up the renminbi.
- .. Likewise, Trump is introducing his steel tariffs after the price of steel has already increased by about 130% from its trough, owing partly to China’s own efforts to reduce its excess capacity.
.. But Trump is not just addressing a non-issue. He is also inflaming passions and taxing US relationships with key allies. Worst of all, his actions are motivated by pure politics. He is eager to seem strong and confrontational in the eyes of his electoral base.
.. what matters is the multilateral trade deficit, not bilateral trade deficits with any one country.
.. Reducing imports from China will not create jobs in the US. Rather, it will increase prices for ordinary Americans and create jobs in Bangladesh, Vietnam, or any other country that steps in to replace the imports that previously came from China.
.. In the few instances where manufacturing does return to the US, it will probably not create jobs in the old Rust Belt. Instead, the goods are likely to be produced by robots, which are as likely to be located in high-tech centers as elsewhere.
.. the Republican Party, standing in solidarity with Trump, seems suddenly to have forgotten its longstanding commitment to free trade, much like a few months ago, when it forgot its longstanding commitment to fiscal prudence.
.. while Trump claims to be looking out for US industrial workers, the real winner from “successful” negotiations – which would spur China to open its markets further to insurance and other financial activities – is likely to be Wall Street.
.. The EU, for its part, seems highly concerned with protecting data privacy, whereas China does not. Unfortunately, that could give China a large advantage in developing AI.
.. In the years ahead, we are going to have to figure out how to create a “fair” global trading regime among countries with fundamentally different economic systems, histories, cultures, and societal preferences.
The danger of the Trump era is that while the world watches the US president’s Twitter feed and tries not to be pushed off one cliff or another, such real and difficult challenges are going unaddressed.