Kyle Bass, Hayman Capital Management founder and managing partner, sounded alarm bells on Tuesday, saying that Chinese banks will likely experience losses that may impact the country’s economy as a whole.
In his interview on CNBC’s “Squawk on the Street” on Tuesday, Bass said other Asian countries like Malaysia were also facing the same issue.
Kyle Bass: China’s bank assets $31 trillion vs GDP of $10 trillion
During his interview on CNBC, Kyle Bass said Chinese bank assets are up close to 400% since 2007, and now represent about $31 trillion against an economy with a gross domestic product of $10 trillion.
Striking a cautionary tone, Bass said: “When you run a bank expansion that aggressively, that quickly, you’re going to have some losses”. He added: “the scary thing about that is a likely 10% asset loss in the banking sector would amount to $3 trillion.”
Elaborating further on the impact of such huge losses, Bass indicated that such huge losses would force China to use much of its foreign exchange reserves (which stand at about $3.6 trillion) and sell bonds to recapitalize the banking system.
Bass indicated that when banks expand so aggressively, they’re entering the non-performing loans cycle in Asia. Touching upon the impact on other Asian countries, he said Malaysia is also facing the same issue, and as a result investors in emerging markets should carefully monitor the size of emerging market countries’ banking systems.
Emerging markets account for 42% of global GDP
Bass said the huge asset losses in the banking sectors are mirrored in many emerging markets, especially those in Asia, and could hence ultimately impact global GDP. He argues the ripples of an emerging market downturn could draw U.S. GDP lower than estimated, but countries like South Africa could be seriously impacted.
He noted his investment group is closely watching nations that run twin deficits, and those that may have to devalue their currency “in order to come back to some level of competitiveness with the rest of the world.”
Striking a cautionary tone for the next two years, Bass said as the loan cycle forces emerging market banks to see steep losses, “the next two years are going to be tough”.
Bass highlighted that Asian banks are experiencing a sustained period of increased loan losses, and that global gross domestic product growth would slow more than expected as a result.
Underscoring the importance of emerging markets, Bass said emerging markets comprise 42% of global GDP. He reckons global GDP will slow more than people anticipate.
Highlighting the forex outflow from emerging markets, Bass said that while money has flowed into emerging markets over the past decade, there was currently a “huge FX reserve drain”. Earlier, David Tepper of Appaloosa Management attributed recent market volatility to reserve drawdowns from China and other emerging markets.
As outlined by ValueWalk, market strategists at JP Morgan Chase & Co estimated that China has suffered year to date capital outflows of around $340 billion as of the end of June. In the second quarter alone, China recorded $140 billion in capital outflows.
This post was originally posted on ValueWalk.