The news that China could be the catalyst for another major recession has been circulating through the investment industry for about four years. It is true that China is having trouble converting their manufacturing based economy into a consumer based economy like the economy of the United States. That isn’t an easy thing to do, and it is very expensive.
Fortunately, the Chinese have the money to make the switch, but the process will cost the government a major portion of their capital reserves. If the Chinese are forced to use capital reserves to keep the banks and their stock market solvent like they did last year, then there is a chance that China’s currency will lose value on the foreign exchange market. That’s where hedge fund investor, Kyle Bass, enters the picture. Bass is betting that China will be forced to devalue their currency over the next three years because the Chinese banks have too much bad debt on their books.
Kyle Bass likes to make risky bets with his investors’ money. His Dallas-based investment firm, Hayman Capital, has a history of investing in questionable assets, and those investments haven’t been as fruitful as the investment Hayman Capital made in 2008. Hayman Capital bet the subprime mortgage game was a sham and investors made billions when the market crashed. Bass believes the same sort of scenario is going to happen in China because of the financial and economic situation. Bass has been wrong before, but he never bet as big as he is betting this time. Bass sold 75 percent of Hayman Capital’s stock holdings to bet against China.
This might not be the right time for Bass and company. Bass has been plagued by bad press because of his questionable decisions. He turned fellow hedge fund managers against him when he took Argentina’s side during the country’s bond default. And when he backed General Motors during the airbag issue on some models he lost an enormous amount of credibility with the public. He is still losing credibility with his recent drug company investments. But Bass believes his China bet will cure all those wounds, but not everyone agrees with him.