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China is facing the US financial crisis 'on steroids' as its real-estate market collapses, famed hedge-fund boss says

Kyle Bass, J. Kyle Bass
Kyle Bass says China's problems are bigger than anyone realizes.Reuters/ Rick Wilking
  • China's property-debt problem is worse than what the US faced in 2008, Kyle Bass said on CNBC.

  • China's real-estate sector was too reliant on debt, and now many public developers are in default.

  • Two Chinese real-estate companies hold a combined debt of about $500 billion.

China's overreliance on real estate has sent its economy tumbling toward what could be a version of the US's 2008 financial crisis, Kyle Bass said on CNBC on Tuesday.

"This is just like the US financial crisis on steroids," the Hayman Capital founder said. "They have 3 ½ times more banking leverage than we did going into the crisis, and they've only been at this banking thing for a couple of decades."

Bass said the years of economic growth China enjoyed prior to the pandemic were made possible by an unregulated real-estate market, which leaned too heavily on debt to expand.

With defaults now plaguing the industry, this could spell trouble for the country's broader economy. The real-estate sector makes up about a quarter of the country's GDP and 70% of household wealth.

"The basic architecture of the Chinese economy is broken," Bass said.

Virtually every public or listed Chinese developer is in default, he said. Two of the biggest, Evergrande and Country Garden, have a collective debt of more than $500 billion. In January, a Hong Kong court ordered the liquidation of Evergrande, and its collapse is sparking fears of systemic risks to come.

By comparison, the US banking system lost about $800 billion during the financial crisis, later re-equitized through fresh capital, Bass said. Chinese officials have been hesitant to provide the kind of economic stimulus the US did in response to 2008.

Bass said that defaults are leading to financial strain on local governments, which raise revenue through land sales to developers. Government bankruptcies, he added, are now trailing the property market, with the local government debt marketplace equivalent to $13 trillion.

This stress has been reflected in Chinese markets, which have lost about $7 trillion since 2021. In recent weeks, Beijing authorities have publicized efforts to stem these outflows, though confidence has yet to pick up.

"China is going to get much worse no matter how much their regulators say, "We're going to protect individuals from illicit short selling,'" Bass said. "Imagine regulators blaming a 15-year swoon on their stock market on short sellers."

Read the original article on Business Insider

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