KYLE BASS: If China Doesn't Change, 'We Will Likely See A Full-Scale Recession' Sometime Next Year
China, he says could see a "full-scale recession" as early as next year if they do not curb the current pace of the credit expansion.
According to reports from the Wall Street Journal, Chinese officials have been equally worried about reckless lending, and intervened last month in the form of rising rates (which in turn resulted in the recent spate of Chinese bank liquidity crunches).
Bass seems to fear however, that this intervention is not enough. He also said that the People's Bank of China would not be able to ensure the country's growth with easy money because of the "inescapable law of diminishing marginal returns."
From the letter (via Absolute Return):
"The scale and pace of credit expansion in China over the last 5 years is truly staggering. The compounded annual growth of bank assets as measured by the China Banking Regulatory Commission has been 30.8%," Bass wrote. "To give some perspective, a 30.8% compounded annual growth of credit in the U.S. equivalent over 5 years would be an expansion of $33 trillion. This rate of credit growth is three times the total credit system growth experienced in the U.S. at the peak of the bubble in 2006...
"The debt-to-equity ratios of Chinese companies are exploding as they funnel new capital, not into yield returning investments, but into the black holes on their balance sheets that have been created by a slowing growth environment. In the industrial sector, there is even outright deflation as overcapacity finally takes its toll," the letter reads.
"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," 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."
That's a big get for the team China bear.
For more of the letter, you'll have to go to Absolute Return (and become a member)>