The Chinese economy is in trouble due to its heavy investment in the real estate sector, which could result in a crash worse than the 2008 U.S. financial crisis, a prominent hedge fund manager says.
“The basic architecture of the Chinese economy is broken,” he said. “It’s broken because it was real estate-centric.
“The substantial majority of Chinese GDP growth was real estate and the concentric circles that surround real estate. And now, you’re having a reversal after an unregulated and unabated climb in real estate.”
Evergrande is the world’s most indebted firm, with $340 billion in debt. The company is at the center of a continuing property crisis that experts say hurts China’s economic growth. In July 2023, it posted combined losses of $81 billion for 2021 and 2022.
Last year, the troubled real estate giant filed for Chapter 15 bankruptcy protection proceedings in New York to shield itself from potential legal actions by creditors seeking to sue the company or seize assets in the United States.
Mr. Bass noted that during the U.S. financial crisis in 2008, the U.S. banking system lost around $800 billion. In comparison, the possible losses in the two Chinese property companies amount to $500 billion.
“We’re talking about $500 billion, where the losses are almost that much in two companies, and all the rest of the developers and bankruptcy,” he said, warning of a devastating outlook for the world’s second-largest economy.
“Now, you’re seeing real estate collapse,” Mr. Bass noted. “So, this is just like the U.S. financial crisis on steroids. They have three and a half 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.
“China is going to get much worse no matter how much their regulators say we’re going to protect individuals from illicit short selling,” he said.
Mr. Bass also warned about China’s local government debts, which last year rose to around $13 trillion, or 76 percent of the country’s economic output in 2022, up from 62.2 percent in 2019.
Part of that is debt issued by local government financing vehicles (LGFV), which cities use to raise money for infrastructure projects, often encouraged by the central government to boost economic growth.
Mr. Bass said that the $13 trillion market is also contending with significant debt and defaults.
“China has 20 plates spinning, and all the plates are crashing right now.” Mr. Bass stated.
However, the report said that approach didn’t address the core problem. It only focused “more on stability than market liberalization” because regulators offered extensions for repaying bank loans and relaxed lending restrictions for property developers.
