“It’s clear to me that China is the biggest threat to the West and the United States,” says Kyle Bass. “China’s goal is global supremacy.”
In this recent episode of “American Thought Leaders,” host Jan Jekielek met with Kyle Bass to discuss the effectiveness of sanctions in the war in Ukraine, the “axis of authoritarianism,” the housing crisis in China, and that country’s ongoing secret war on the United States.
Bass is the founder and chief investment officer of Hayman Capital Management and a founding member of the Committee on the Present Danger: China.
Jan Jekielek: About a year ago, we talked about the Chinese digital yuan and the threat that poses. You described it as an existential threat. It’s basically the social credit system on steroids impacting many other countries. So now with this Russia–Ukraine war happening, we see the digital yuan accelerating in use.
Kyle Bass: In the Beijing Olympics this year, the Chinese Communist Party forced the participants to download the e-yuan app and to use it as their payment system while in Beijing. That, of course, begins the forcible use of the e-yuan.
They want to lessen their dependence on the U.S. dollar. About 87 percent of global transactions that China settles are in dollars. They’re desperately short of energy, food, and basic materials. They have to buy these things every day around the world, and no one trusts their currency, and they still have a closed capital account. They have to use their dollars. So they’re trying to lessen their reliance on dollars.
They’re also exporting the Chinese tech stack all over the world. This is an app that tracks where you are, your name, your Social Security number: all of your identifiers.
They’re exporting digital authoritarianism. And it’s being overshadowed by the Russian invasion of Ukraine. How many articles have you seen on the e-yuan in the past three months? Almost none.
Mr. Jekielek: The Chinese regime is aligning with Russia. Maybe you can tell us about that.
Mr. Bass: On Feb. 4, Chinese leader Xi Jinping and Russian President Vladimir Putin issued a press release on their new strategic partnership. No areas of cooperation are “off limits,” which, of course, means hypersonics, nuclear, all of the good and bad things they could be working on together.
They’re basically forming an axis of authoritarianism between China, Russia, and the rest of the bad guys around the world. This war’s forcing a bifurcation of the world into the rules-based, rights-based West and the axis of authoritarians.
Mr. Jekielek: I want to switch gears and look at the Chinese economy. What was the economic impact of COVID-19 policies on China?
Mr. Bass: China is really struggling with inflation. They’ve got energy prices ripping. They’ve got food prices ripping. They’ve got things happening that they can’t handle as a government. And I think they’re panicking.
Mr. Jekielek: One of those things is their housing crisis. Is it orders of magnitude greater than anything that ever happened in the United States?
Mr. Bass: Both residential and commercial building are about a third of their economy. In the United States, it’s about 17 to 18 percent. So it’s very impactful in China. The average housing price in Tier 1 cities in China is 35 to 36 times the average income. To put things in context, when the United States had its housing crisis in 2008, we got to six times, and that’s where affordability broke.
They have their own system in China. They have their own propaganda, their own economy, which is yuan-based. And then they’ve got their interactions with the rest of the world, which are essentially dollar-based. Internally, that economic tree can fall and no one might hear it because they can print as much money as they want. And they can fill the holes in the banks without causing crisis, but it’s important to note they’ve only had some sort of capitalistic-based economy since early 2000. The U.S. has been at it for more than 100 years. And look at how badly we screwed up in 2008.
They’re relatively new to this game, but they got to a point where the reckless printing of capital and real estate speculation took real estate to levels that actually are causing major population decline. In China today, the average birth rate per is now only 1.2 children. You need a 2.1 birth rate just to break even on your population. We already knew there would be a significant drop because of China’s former one-child policy.
But they allowed real estate prices to go so high that it effectively priced out the entire middle class. So what’s happening is Chinese men are living with their parents, they’re not marrying, and they’re not having kids. The birth rate’s collapsing, and it’s a direct result of rampant speculation in the real estate markets.
I think the Chinese government is intentionally taking prices back down, and they’re going to try to keep them there to change their population demographics over the long run.
Mr. Jekielek: Let’s jump to sanctions. Recently, and I’m paraphrasing, the Treasury secretary basically said to China, “Look what we’ve done to Russia. The same will happen to you if you behave in such ways.” How does that strike you?
Mr. Bass: The U.S. and the allied Western powers are supplying some lethal aid to Ukraine, but the tip of our spear happens to be economic sanctions. But we aren’t really willing to sanction Russia’s primary business. Two-thirds of their economy is selling crude oil and natural gas to the rest of the world.
They produce about 11.5 million barrels of crude a day. They export 8 million barrels and consume about three and a half, which means that the West is still sending Russia about $800 million a day. And that doesn’t include gas. Anyway, we haven’t effectively sanctioned Russia.
If sanctions are a primary tool, then we should immediately sanction their energy business, which of course would cause crude oil to move up maybe to $200 a barrel.
It would hurt us, but it would really, really hobble Russia. Russia’s production is already down about 550,000 barrels a day because some in the West have been reluctant to buy Russian crude. That’s having a huge effect on Russia’s production. Imagine if we fully sanctioned their energy business for six months. We could hobble their energy production and really cut the blood flow to the tumor.
Mr. Jekielek: So, lessons from the Russia–Ukraine war situation. Is there actually any capital flight happening or reduced investment in China? We know what happened with Russia, but are people reading the tea leaves that way?
Mr. Bass: They are. You can see it in the capital flows. You can see it clear as day in their current account on the investing side. There was an article in the Ottawa Citizen just a couple of days ago, an opinion piece saying, “Why on earth are Canadian pension funds so heavily invested in China? They should divest.”
You’re starting to see people wake up and say, “What are we doing?” People are finally saying, “Wow, these guys really are bad guys.”
You should invest somewhere where there’s a rule of law, where there are basic human rights, where at least you know that your money is safe.
Mr. Jekielek: As we finish up, let’s talk about a few things closer to home. I saw that you’ve been interested in the imports of these sear devices that can turn handguns into automatic weapons. A lot of this stuff is coming from China, and it’s like the CCP is doing these sorts of things to destabilize our country, such as the huge amounts of fentanyl coming from China.
Mr. Bass: We have more than 55,000 deaths per year now because of Chinese fentanyl imports. Chinese businessmen don’t engage in illicit trade knowing that if they get caught, they’ll be killed by their leadership. Their leadership is endorsing what’s going on. The same with the sear device.
It’s no bigger than the end of your finger, and it takes the recoil of a gun and immediately reloads the chamber and fires it. And it’s not only for handguns, but for assault rifles as well. It changes guns from semi-automatic to automatic.
Once China figured out that this could increase crime and havoc in the United States, they started shipping them here. Now it’s a federal felony to possess one, but criminals don’t care. They commit felonies every day. China and Russia are experts at creating chaos and sowing discontent. That’s their game.
And these full-auto sears are a real problem in the United States. They’ll create more death, more destruction, and more crime.
Mr. Jekielek: Just for the record, which of these regimes do you see as the biggest threat to America and this free world?
Mr. Bass: It’s clear to me that China is the biggest threat to the West and the United States. China’s goal is global primacy.
This interview has been edited for clarity and brevity.