“Imagine if the Chinese government had access to every Tom, Dick, and Harry in America … and they have the ability to know where your bank account is, what it looks like, what your income is, and if you’re in financial difficulty. Imagine if they could cross-run an algorithm that says, let’s look for U.S. government employees that have Tinder that are short on cash—and maybe they’re married—and we can corrupt them immediately.”
China’s new digital currency, the e-yuan, is the “single largest threat to the West in the last 50 years,” says Kyle Bass, founder and chief investment officer of Hayman Capital Management and a founding member of the Committee on the Present Danger: China.
But the rollout of the e-yuan has gone largely unnoticed, “overshadowed by the Russian invasion of the Ukraine,” Bass says.
In this episode, we discuss the dangers of the new e-yuan, the strengthening China-Russia alliance, and why Bass believes the Chinese regime is actually intentionally crashing its housing market.
Jan Jekielek: Kyle Bass, it’s such a pleasure to have you back on American Thought Leaders.
Kyle Bass: Great to be back, Jekielek.
Mr. Jekielek: So last time you talked, it was about a year ago, we talked about the Chinese digital yuan and basically the threat that it 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 and the Chinese posture on that, we see the digital yuan accelerating in use. I don’t know if it’s accelerating a lot or a bit, but why don’t you tell us?
Mr. Bass: Yes, sure. So with the advent of the Olympics in Beijing, we call them the genocide games happening earlier this year. One of the things that the Chinese Communist Party did was force the participants to enroll and download the e-yuan app and force them to use it as their payment system while in Beijing. That of course begins the forcible use of the e-yuan. And what I mean by that is China’s rollout will be, they can definitely force it on their own population. But their goal in this global rollout of the e-yuan is multi-prong.
The first prong is they really want to try to lessen their dependence on the U.S. Dollar. About 87 percent of global transactions that China settles are settled in dollars. They’re desperately short energy, they’re desperately short food, they’re desperately short basic materials. They have to go buy these things every day around the world and no one trusts their currency and they still have a closed capital account. And so what do they have to do? They have to use their dollars to do so. So what they’re trying to do, number one is lessen their reliance on dollars.
And maybe even closer to number one, one A, is they are trying to basically export the Chinese tech stack into everyone in the developed west and east all over the world. And what that means is this isn’t a simple digital payment app. This is an app that tracks where you are, what your name is, what your social security number is, where all of your identifiers are. It has geolocation ability. And it also gives a direct line from the Chinese government to an individual outside of the purview of law enforcement, outside of the umbrella or oversight of banking regulators.
Imagine if the Chinese government had access to every Tom, Dick and Harry in America and in Europe and in Canada. And they had the ability to know what your bank account is, what it looks like, what your income is and if you’re in financial difficulty. Imagine if they could cross run an algorithm that says, “Let’s look for U.S. government employees that have Tinder, that are short on cash, and maybe they’re married and we can corrupt them immediately. It gives them the ramp to corrupt anyone and everyone around the world that’s corruptible, which is a real national security problem.
So it’s a way they can export digital authoritarianism. It’s a way they can export their coercion, their bribery and everything they do in the belt and road countries around the world. It is I think the single largest threat to the west in the last 50 years. And it’s being overshadowed by the Russian invasion of Ukraine. How many articles have you seen on the e-yuan in the last three months? Almost none. There are a few, but it is not top of mind and it needs to be top of mind.
Mr. Jekielek: Well, and so arguably, basically Russia with the Russian Central Bank being sanctioned. Russia has been looking for other ways of doing payments. I think Hungary has said, “We’ll use the Ruble to pay for energy.” And the Chinese regime is aligning with Russia. We’re talking about the genocide games. They signed a very tight agreement. I know this is something that you’re very up on. Maybe you can tell us about that right now.
Mr. Bass: Yes. I think the world needs to go back and re-read the February 4th joint communique between Xi and Putin. They issued a public press release and it goes line by line on what their new strategic partnership is going to look like, that no areas of strategic cooperation are, “Off limits,” which of course means hypersonics, nuclear, all of the good and bad things that they could possibly be working together on. There, Putin in Russia basically endorsed the concept of the reunification of the Taiwanese separatists and then part and parcel the Chinese endorsed Russia’s realignment of mother Russia.
And basically usurping the Ukraine again. They say it, they come out and tell you who they are, what they’re going to do. And that they’re basically forming the new axis of authoritarians between China, Russia, and the rest of the bad guys around the world. And I think what this war’s doing is forcing that bifurcation of the world into the rules-based, human rights-based developed west and the axis of authoritarians. And I think that will continue to move in those directions very quickly over the coming years.
Mr. Jekielek: One of the big challenges is, and I have to mention this, is that the rules-based order itself is suffering a bit. And you have a lot of people wondering, “Hey, wow, it’s like, we have to pick between two, not so great situations.” What are your thoughts on that quickly?
Mr. Bass: I know there’s been a huge wedge or set of divisive rhetoric in the U.S. really that Trump accelerated with his antics. Many of the things Trump did with foreign policy were right on spot, but they were overshadowed by him being a little bit of a buffoon in his personal life and even in how he interacts with the rest of the world. That split and in the… Let’s just focus on U.S. politics. We can go to Canada, we can go to Europe, we can go wherever you want to go. But in the U.S., that divide’s never been wider.
The radicals have pushed both parties so far on both sides, that I actually feel like they’re coming back a little bit, even though they’re trying to double down in rhetoric but they’re realizing that this experimentation on the radical left and radical right has gone too far. And I think when you look at the U.S. throughout history, whenever we are involved in a great conflict or have a really large problem, we tend to come together pretty quickly. And there are some things that the administration comes together on. Think about The Hong Kong Human Rights and Democracy Act passed almost unanimously with one idiot voting against it.
So where do you think Republicans and Democrats agree? They agree on democracy. They agree on rule of law. They agree on punishing those that basically tear up international agreements. And so I realize that there is this division and you and I both know on social media who is sowing this division. It’s China and Russia with their propaganda wars, every single day, putting thousands and millions of bots on Twitter and Facebook. And they’re attacking literally daily. And you can see their alter egos and the fact that they’re all pseudonyms and you can see what they do.
So look in the grand scheme of things, I think the west will come together, like you saw NATO immediately come together. I don’t think Putin bet on NATO not being divided on this. Now, clearly Germany has some issues that it needs to deal with to really feel like NATOs completely put together. But I think we’re going to see the west really come together as we move forward. And I think the war between Russia and Ukraine’s going to get worse before it gets better.
Mr. Jekielek: I think the fact that the Chinese Communist Party and Russia right now are working so tightly together and arguably a number of people on the show have actually argued that it’s essentially that Chinese support that’s allowed Russia to do what it’s doing in the first place. The knowledge that basically China has got its back in the first place. That breaks down a lot of the kinds of narratives out there that I’m hearing because we know exactly what the Chinese Communist Party is around. And we know how tight this cooperation is. I guess my question is one, how much is this dollarization efforts that you described earlier, how much is that really accelerating now through this bifurcation that you’re describing? Is that actually a real thing? Is it a concern?
Mr. Bass: It’s a major concern of mine. It’s a major concern of the U.S. DOD, Canadian DOD, the allies in Europe. It is a major concern behind the scenes. For some reason, it’s not in the media and the powers that be are focused on this, but it might not even be the right powers. It’s DOD and intelligence are really focused on it. But like I say in the U.S., God bless Janet Yellen, but she doesn’t have a national security bone in our body. We need someone in treasury that really understands the potential impact that the e-yuan can have on the west over time.
And there are some senators that you’ll see in the coming weeks are going to launch legislation to outlaw its use. And I believe that that legislation must happen. I know it sounds hyperbolic to say that Chinese don’t have a right to issue their digital currency. They have the right to do whatever they want to do internally, but that should not be used by anyone in the west, if we know it’s good for us. So they are on the rollout, Jan. It is not taken hold and they have not forced its use yet on U.S. and Western companies and their management teams, but that’s coming.
Mr. Jekielek: Well Russia obviously has been reduced in its ability to use the dollar.
Mr. Bass: Not very much.
Mr. Jekielek: Okay. So that’s interesting. Before we go there, I want to go back to another topic that we’ve covered before, which is basically this land purchase that you discovered some years ago. I think it’s over 220 miles by a Chinese billionaire with ties to the Chinese PLA, the military, and also the Chinese Communist Party in Xinjiang, large airstrip built right beside an air force base, giant windmills to be built, all of this. And this actually triggered legislation, the Lone Star Infrastructure Protection Act, if I recall.
Mr. Bass: That’s correct.
Mr. Jekielek: And so that’s enforced, but what has actually happened since?
Mr. Bass: You’ve seen General Sun move to divest portions of their land holdings, but at the same time they’re accelerating their applications to build 700 foot tall windmills. First of all, when you look at the wind values in that area of the state, the state of Texas produces the most wind power of any state in the United States, both wind and solar. We produce about a quarter of all the alternative energy in the United States. The highest wind values if you just look at the state are clearly in the panhandle area. So call it North, Northwest, and where we’re talking about, Jan is basically right off the border in Del Rio, which is Southwest, where the wind values are much lower.
If you and I were setting up a wind farm, we would set it up where the wind values are seven to nine on a scale of one to 10, not on wind values that are three to six. It just makes complete sense. Now, strategically, if what we’re trying to do is set up 700 foot windmills that have line of sight to the border, and have line of sight to the U.S.’s number one air base by volume and by training where we train all of our pilots. And there’s some other secret things that go on there that the Chinese are well aware of that can’t make it in the mainstream media. And it’s really why they’re there.
And so Senate Bill 2116, or the Lone Star Infrastructure Protection Act was something that I worked very closely with the authors on and testified in both the House and the Senate on, and we got it passed unanimously by the way, 31 to zero and the Texas Senate. Again, things like this have people saying, “Okay, this has to stop.” The question asked during the Senate hearing, I asked the Senate panel, I said, “Does anyone here think it’s a good idea to let a former PLA general who owns the most real estate in Xinjiang, do we think it’s a good idea to allow him to plug directly into the Texas electricity grid?” And not one person thought it was a good idea. And at the back of the hearing, it passed unanimously. When you ask what’s happening now, I find something to be really interesting. First of all, how did this acquisition get through CFIUS? And one-
Mr. Jekielek: And just briefly, CFIUS, just remind everybody.
Mr. Bass: Right. The Committee on Foreign Investment in the United States. So if you look at the last two CFIUS denials, they were in the Obama administration and those denials were based upon proximity to U.S. military bases. So this is not a Republican issue, it’s not a Democrat issue, it’s a national security issue. And somehow this made it through, Jan. So right now, their ability to plug directly into the Texas grid has been canceled. But what they’re doing is changing the names of the ownership of the property from GH America to a more American sounding name.
And they are still applying to put up 700 foot tall windmills. When you think about over the top mapping that they can do from 700 feet, they can literally map anything that walks by, flies by, runs by within a 50-mile radius. So if you just think about that for a second, they can map anything that flies by within 50 miles. Which means every single airplane, aircraft and secret thing we might be flying down there in Del Rio, the Chinese are going to be able to map. And that’s just insane, we can’t let that happen. And we need to get a re-review of CFIUS on that, on this whole relationship because it’s still continuing to grow. It’s not shrinking.
Mr. Jekielek: Well, incredibly disturbing. One of the reasons I appreciate speaking with you is you have a good grasp of the Chinese Communist Party’s doctrine of unrestricted warfare. Basically using every possible tool to wage war, for lack of a better term in this case against their prime enemy, the United States. So this is an example. Because there’s still going to be people that are going to come out and say, “Hey, show me the evidence that this is actually connected with the Chinese government,” for example. People say things like that, what do you say?
Mr. Bass: Yes. It’s so easy to see. You can see that GH America was set up in Delaware. It was funded by the Chinese company and it’s run by General Sun. And they used a, let’s just say less than scrupulous Texas businessman to front for them, to go buy all of these ranches and then flip them all to GH America at the end. It’s insidious and it’s genius, meaning they create a U.S. corporation to be the owner.
And if a U.S. Delaware-based Corp is the owner, it’s very difficult to see that it’s the Chinese Communist Party as the owner. And so I think what they’re doing is really smart. We as a country need to…imagine if we tried to go in and buy 200 square miles next to China’s biggest air base and on their closest border with let’s say Russia. The Chinese would never, ever allow that to happen and they don’t allow that to happen. And so why are we letting that happen? It makes no sense.
Mr. Jekielek: Well, and there’s again, this broader idea that even those entities that maybe aren’t constantly working directly with the Chinese Communist Party or the government can at any moment be co-opted for national security reasons, for example. For actually any reason that the Chinese Communist Party deems appropriate to basically work on their behalf.
Mr. Bass: Well, General Sun has been the party leader in many of the local districts of the Communist Party. His history is not debatable, so he’s already there, but you’re right. Anyone that is a Chinese national, or even a naturalized U.S. citizen that used to be a Chinese national, we need to be thinking, I know this sounds very nationalistic. It may sound xenophobic, but I’m sorry. You and I both know that the Chinese Communist Party is our mortal enemy. Just like the Russian government is our mortal enemy. I have many Russian friends. I have a few Chinese friends. They’re not my enemies, but I hold them at arm’s length because I know what kind of reach their government’s have over their families. And they play those games.
So we need to put together, set forth a comprehensive U.S. policy. We need to do an entire re-review of all of the land holdings around all of our strategic areas that doesn’t just isolate U.S. military bases. We need to know who owns all the property around our nuclear power plants. Think about the grids of all the states. We need to think about our electricity infrastructure, we need to think about our nuclear infrastructure, we need to think about our military infrastructure, because right now, Jan, we don’t know. We don’t know who owns all that property. I think the good news is we are working on these things and we need to work on them more and we need to work on them faster.
Mr. Jekielek: So I want to switch gears a little bit and just look at China now directly, like the Chinese economy in particular. Okay. So first of all, we’re just emerging, I hope out of some really difficult coronavirus policy that has had an incredibly negative effect on the U.S. economy, on society and so forth. Now, this was spurred by Chinese policy. We adopted here in America lockdown policy, which no one’s ever done. So economies were hit everywhere. Chinese economy was hit, but they came out of that faster. So what was the economic impact on China versus the U.S. of these COVID policies now as we’re emerging out? And China, frankly, is going back into right now as we speak in Shanghai and Xinjiang. Yes.
Mr. Bass: So I have a nuanced view of this, and actually, I don’t think you and I have discussed it. If you accept the World Health Organization as the arbiter of the Wuhan virus or COVID or whatever you want to call it. And you want to accept the WHO’s infection numbers and death numbers by country. If you accept those to be true, there’s some really interesting findings that one can make just based upon the numbers. In a population of 1.4 billion, China claims less than 5,000 deaths. If you break it down by cohort.
And so if what you’re trying to do is isolate the Chinese genome, or let’s just say the east Asian genome. And when you look at the way that WHO classifies these areas of the world they call Asia, it includes the Middle East. Southeast Asia includes the Middle East. So if what I’m trying to do is isolate an east Asian genome that doesn’t include the Middle East, you take the WHO’s cohort, you subtract the Middle East, and you add China. And that cohort of people has a little bit more than 2.1 billion in population. And if you look at the death rates in the rest of the world, then you were to extrapolate it and assume everything is linear, and that it doesn’t affect one genome more than the other.
You should see a huge amount of deaths in that 2.1 billion cohort. What would you expect to see in your mind of 2.1 billion people? How many people should have… If 6 million people have died on a planet of seven and a half billion, how many people should be dead in the 2.1 billion cohort? It should be basically 2.1 over seven times, 6 million—should be about 1,000,008, and the number’s 220,000. So the virus is disproportionately affecting different genomes, if you follow me. If you accept all of those numbers. And I’m not a scientist, I’m just doing math. And I’m using the WHO as the arbiter of these numbers.
And so I don’t believe this virus naturally emitted itself through zoonotic transmission. I think it’s definitely designed in a lab, and I think it affects different populations in a different way. So when I hear that Shenzhen’s locking down, 17.5 million people all of a sudden lockdown. It was coincidentally, most interestingly happening in the week that crude oil hit its highs at $123 a barrel in west Texas. Maybe it was just a coincidence.
And then when they announced that Shenzhen was locking down, it sent crude oil down from 123 to below 100. It dropped $27 in five days. Then it traded back up to $117. And within two days of that happening, the two phase shut down of Shanghai is happening, which dropped the oil another $20 in three days. So, Jan, I think the one thing that China is really struggling with is inflation. They’ve got energy prices ripping, they’ve got food prices ripping. They’ve got all of these things that they can’t handle as a government happening. And I think they’re panicking right now.
Mr. Jekielek: Well, one of the things that they seem to not be able to handle is this housing crisis. It’s like a third of the Chinese economy is housing. It’s wildly overblown. Is it orders of magnitude greater than anything that ever happened in the U.S.? I would guess. Right?
Mr. Bass: Oh, really? Yes.
Mr. Jekielek: And it’s unclear. It looks like it’s in the process of collapsing, but sometimes, somehow it’s still holding out. I know you’ve been watching this.
Mr. Bass: Yes. So number one, basically real estate writ large in China. So not just housing, both resi and commercial is about a third of their economy. In the U.S. it’s about 17, 18 percent. So it’s very impactful in China. Your point about affordability, the average housing price divided by the average income or median income in Tier 1 cities in China, the price got to be 35, 36 times income. Just to put things in the context when the U.S. had its housing crisis in 2008, we got to six times, and that’s where affordability broke. Okay. So when you put the things in the context, what happens in China? The way I look at it, they have a closed system.
They have their own system within the walls of China. They have their own propaganda, they have their own economy. They have everything that goes on that’s yuan-based. And then they’ve got their interactions with the rest of the world, which is essentially dollar-based. Internally, that economic tree can fall and no one might hear it because the PBOC can print as much money as they want to and they have. And they can fill the holes in the banks without causing crisis. They can keep all 30 plates spinning on all their fingers and toes, but it’s important to note that what Xi didn’t realize and what the economic planners in China didn’t realize. Now, mind you, China’s only been at this game for 20 years.
They’ve only had some sort of capitalistic-based economy since early 2000. The U.S. has been at it for well over 100 years. And look at how bad we screwed it up in 2008. I’m just going to make that point. They’re relatively new to this game. But they got to a point where the reckless printing of capital and the speculation surrounding Chinese real estate, took real estate to levels that actually caused major population declines.
And so what’s happening in China today is the average birth rate of the average woman in China is now only 1.2. You need a 2.1 birth rate just to break even on your population. So we all know what the demographic trends look like of the various countries in the world. And China, we knew there was going to be a pretty significant move down because of the one child policy.
Mr. Jekielek: And so this is all on top of this massive demographic hole that they’d have no idea how to deal with.
Mr. Bass: Correct. So they had one that was already fairly linear and it moves non-linearly between 2040 and 2050, a pretty big decline in population. But now you have a scenario where they allow 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. So the birth rate’s collapsing, and it’s a direct result of rampant speculation in the real estate markets. So when you see Xi clamping down on the real estate markets, and just last Friday, multiple developers just halted trading in Hong Kong.
And they said, “We just can’t file our annual reports.” What do you mean you can’t file your annual reports? You’ve been lying all along and now you have no idea what to say. They’re hyper levered and they’re all going to go broke. Now. will the Chinese government restructure them in yuan, absolutely. If you’re a westerner holding us dollar bonds, I say, you’re going to end up with what you deserve, which is zero. So I think the Chinese government is intentionally taking prices back down, and they’re going to keep them there, or try to keep them there to change their population demographics over the long run.
So this isn’t going to be a crash and immediate rebound in printing of money and everyone’s going to be happy like we had in the U.S. 2008, 2018. We had a major, major move because we could print the money and turn the crisis around. In China, not so much. And it’s actually happening here now too. We all know that asset values have gone up so much, so quickly and so much further ahead of income that we’ve had negative real income. So we’re all in this bucket. And it’s due to the central banks playing God with the economy and you and I both know that can’t happen at infinitum. We’re going to have these troubles. So I think China has a great reset happening. And it’s by the government, for the government, for the long-term betterment of China, to the detriment of anyone invested in China.
Mr. Jekielek: Fascinating. Well, and actually just on your previous point, I haven’t heard that argument about basically the virus having demographic specificity. Have you seen any scientific papers on this recently? Have you seen any research actually done on this? Out of curiosity, we’re running with a theory and someone’s going to investigate it.
Mr. Bass: Yes. This isn’t a theory. What I’m actually showing you is factual data. I just put together a spreadsheet, I spent many nights on it. Something really interesting happened while I was working on it. There used to be, if you just go to the WHO’s website and you look at the data, you can download an Excel spreadsheet. One of the columns used to be deaths per 100,000, just to give you a number that was comparable to the rest of the countries in the world. And Chinas’ was better than Azerbaijan and was better than many other places.
Mr. Jekielek: But we just discussed how we can’t believe any numbers out of China. I’m not saying that it might be much lower. But it’s not 5,000, I think.
Mr. Bass: Right. Well, let’s assume the tracking error is 1,000 percent. It’s still not even close to the number it should be. If there’s a log normal distribution, or let’s just say, if there’s a linear distribution of deaths across the world, you would see a much, much… You would see a much higher number. And so one would assume that many of the other East Asian countries are reporting the proper numbers, the real numbers, and let’s just assume China isn’t. All I’m saying is if you go look at those numbers, I’m not a geneticist or genetic statistician, but I can see the numbers just like you can.
Mr. Jekielek: Well, I can also see another argument there, the pro-lockdowners who still exist despite the ton of evidence, at least in the west, that these things have failed to achieve their goals completely. They might say, “Well, actually lockdowns did work in all these regions.” And because they did have very strong draconian lockdowns with this contact tracing and everything. I don’t know. We don’t necessarily need to debate it. I think there could be a few explanations for a pattern that you described, which seems real.
Mr. Bass: Yep.
Mr. Jekielek: Yes. Another thing about the lockdown. So I thought was very interesting that they’re connected with a lowering of oil price. And you think there might be some sort of engineering going on around that. It’s also affecting Apple and Tesla products. We just had Tiffany Meier over at China in Focus. One of our shows has just been reporting on this. It’s having a pretty significant impact, not just within China, I guess.
Mr. Bass: Yes. Right. Again, when you think about what China is short, what they are in desperate need of on a daily basis, it is energy, it’s food [and] its basic materials. So this didn’t have a… It had the similar effect on tech. It had a similar effect on global economists, immediately redrawing the Chinese growth numbers, which took down the commodities complex that China’s desperately short. It took down base metals, it took down food prices, it took down wheat. It took down all of these different things saying, “Chinese demand is going to suffer. Therefore, we need to change our forecast.”
Well, that might be exactly what China wanted them to do because you and I both know they’ve been stockpiling grain. They’ve been stockpiling as much energy as they can prior to Putin’s invasion. This is something people don’t know. Xi and Putin have met 40 times in the last 10 years. I haven’t met with my extended family 40 times in the last 10 years. Don’t tell me that they aren’t close. Don’t tell me that this plan hasn’t been being worked on last decade. They’ve been working on this together. They all know. It’s not coincidental that Putin waited till the end of the Olympics to invade. It’s not coincidental.
And if you go look at all the rhetoric between China and Russia and propaganda in the marketplace, they specifically said in December, January, that there are no plans to invade anything. The Russian defense minister said. So it’s all out there, Jan. And these meetings and the February 4th communicates and all of the work on the virus. Again, I’m starting to sound too conspiratorial to myself, but I think about, who benefits from the virus and who didn’t? If you remember, China’s current account, basically money in versus money out was heading into the negative territory, because why?
The Chinese population was allowed to travel, spend and invest abroad. And guess what they have to spend with, no one takes yuan. So they have to spend dollars, euros, yen or pounds. So the outflow was increasing exponentially. At the same time, the Hong Kong protests hit their Zenith and magically, the coronavirus happens. What does that enable China to do? Shut off international travel, clamp down on their own people and take over Hong Kong quietly. So all of those things happen perfectly for China.
Mr. Jekielek: Yes.
Mr. Bass: At the right time.
Mr. Jekielek: It’s pretty stunning.
Mr. Bass: Yeah. And they’re still locked down. So their current accounts, very positive. They’re building up dollar reserves at the time in which they’re going to try to roll out their e-yuan. It seems like one perfectly connected diabolical plan. When you just look backwards.
Mr. Jekielek: Yet you would still say that the Chinese economy is dramatically exposed. Because it’s worth like 350 percent levered to GDP. That is-
Mr. Bass: Correct. Their banking system. So the U.S. banking system entering our crisis in 2008 was about one times levered to our GDP. So we had about 17 trillion of assets. We had about 17 trillion of GDP. And if you include non-bank assets off balance sheet, assets like Fannie and Freddie and the derivative small markets, it got to 1.75 times. China today is 350 percent banking assets to GDP. Meaning their banks are so much more levered than ours with a third of their economy dependent upon real estate with real estate collapsing. You can just do back of the envelope math and realize that they are having a real financial crisis. Now, the PBOC can fill those holes with yuan. But the dollar investors in China, the dollar bond index for China has had its highest yields ever, meaning prices at their lowest level. And they’re going to keep going lower.
Mr. Jekielek: So let’s jump to Russia. I couldn’t help but notice. Just very shortly before this interview, you have the treasury secretary basically saying, “To China,” this is me paraphrasing. “Look what we’ve done to Russia. The same will happen to you if [you] behave in such ways.” And this was something that was echoed by Wendy Sherman, the Deputy U.S. Secretary of State. How does that strike you?
Mr. Bass: Well, if the U.S., and let’s say the allied powers of the West are not going to engage in a kinetic war. What we’ve decided to do is supply some lethal aid. But the tip of our spear happens to be economic sanctions. And the sanctions that we’ve implemented to date have been a lot of hoopla, but not a lot of follow through. And what I mean by that is we aren’t 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 they consume about three and a half. And so every day that we refuse to sanction Putin’s energy business, the rest of the West is sending him about $800 million a day. Just think about that. 8 million barrels x 100. And that doesn’t include the gas. That’d be another, roughly about another $200 million a day. Anyway, we have not effectively sanctioned Russia. We sanctioned some banks, but we didn’t sanction the banks that process all the payments for the energy business.
The banks that we sanctioned, Europe said they were going to sanction them too. And Germany’s dragging its feet, not following through on these sanctions. So yeah, we decided to go after the top of the top of Russia, of the oligarchs, who we know commingle and share funds with Putin, or help shelter his personal funds around the world, but we haven’t stopped the blood flow to the tumor. We haven’t been willing to sanction that energy business.
And if we’re also not willing to sanction, so Visa, MasterCard stopped processing dollar payments for the Russian banks immediately, upon our primary list of sanctions. And the very next day, what happened? China’s banking system allowed UnionPay to step in and provide the dollar payment systems for the Russian banks. Not a problem. Now, have we sanctioned UnionPay? No. Have we sanctioned the Chinese banks? No. We have historically been unable/afraid to secondarily sanction those that contravene our primary sanctions.
So Jan, if our sanctions are real and they’re not just Swiss cheese, because right now it’s a giant piece of Swiss cheese. We give sanctions and then on the Treasury’s website, we actually give instructions how to do the workarounds. “If you have anything to do with energy, any energy services, or a supplier in any energy business, you’re exempt.” And we show you how to move around it. And so my view is, if sanctions are a primary tool, we better use them and we should immediately sanction their energy business which of course would cause crude crude oil to move up maybe to $200 a barrel.
It would hurt, but it would really, really, really hobble Russia. Russia’s production is down about 550,000 barrels a day because some of the West has been reluctant to buy Russian crude because of either moralistic reasons or fear that they might be sanctioned in the future. That’s having a huge effect on Russia’s production. It’s backing up in their pipes and it’s forcing the Russian energy companies to shut in production. Imagine if we went the full way to sanctioning their energy business just for six months. We could hobble their energy production and really cut the blood flow to the tumor.
We would pay a price. This administration already owns the inflation that’s out there, whether or not they deserve it. The money was printed in both administrations. But the fact of the matter is you’re going to already see the political consequences of what’s happening now. So you might as well start thinking about national security and doing this right. And now the rhetoric that we’re seeing out of the Treasury towards China, China is only one set of supplying munitions or support to Russia’s military away from serious sanctions.
In the U.S, one thing we haven’t talked about, U.S. institutional investors have funded Putin’s war machine. They have funded Xi’s war machine. The institutional investment that invests in Russian government bonds, Russian banks, Russian owned companies, Chinese government bonds, Chinese owned banks, and Chinese companies. Dollars are ubiquitous if you’re an authoritarian government. And so you can use the money coming in to build whatever you want to build or trade however you want to trade, and they have. And so just like the lead up to World War II, where the U.S. lent Germany billions of dollars to build their war machine to fight us, we’re doing it again.
And it’s crazy what we’re doing. And so when Russian companies got sanctioned, institutional investors had to write those investments to zero. So we remember how they halted trading and companies like Spur Bank and others went from 20 rubles to zero, or very close to zero. So U.S. institutional investors can sweep Russian investments under the rug because they’re such a small fraction of their multi-billion dollar portfolios. But U.S. institutions have almost 10 percent or more of their assets allocated to China because they think it’s the second largest economy in the world. And they have a giant fear of missing out on the returns.
But those fiduciaries are now on notice. And I think the Treasury’s warning to China is an interesting moment in time to think about your fiduciary responsibility. And in your fiduciary responsibility as an investor, especially if you’re investing other people’s money. If you’re investing a school endowment, you’re investing a pension plan’s money, you have to act with the prudent man rule in place. And if I were in a courtroom with you, and I said, “So Jan, did you find it prudent to invest in a country who won’t submit their companies to bonafide PCAOB covered audits to Western audits? Or do you think it prudent to invest into a country of an authoritarian genocidal leader like Xi Jinping with the last two secretaries of state classifying China as committing genocide and crimes against humanity in Xinjiang? Would that be prudent?”
Well, what Putin has just taught you is it’s not prudent. It doesn’t matter how cheap the company is. It doesn’t matter how great the bank is and how it pays dividends, how much money it makes. It is owned, controlled and operated at the pleasure of Vladimir Putin, just like everything is owned, operated and driven at the pleasure of Xi Jinping in China. And so this caused a linkage between fiduciary saying, “Oh, I have to buy these things because A, if you’re missing out. B, it’s so cheap, I have to own it.”
What Putin just told you is you can blanket an entire nation with fiduciary worry and not just individual companies that might be making things for the surveillance equipment in Xinjiang or for the incarceration of the Uyghurs or Mongolians or Tibetans somewhere. This is a global issue for the sovereign itself because of its authoritarian dictatorial rule. And so fiduciaries today, I think should lose their jobs. If they stay invested in China, knowing what’s coming. China’s one move away from sanctions. And if, and when the U.S. decides to sanction a Chinese payment system and a Chinese bank, that’s it.
Mr. Jekielek: But are they really one move away or do the Chinese know that America won’t do that because of, let’s call it Wall Street’s deep, deep investment?
Mr. Bass: Yeah. Wall Street didn’t have much say, and once Putin started massacring the Ukrainians, Wall Street had no say. Immediately the MSCI had to take Russia out of the index and the Treasury went and sanctioned the Russians.
Mr. Jekielek: Well, I guess what I’m saying is that’s a small piece, as you said earlier. And it’s also the, let’s say the depth and breadth of the-
Mr. Bass: Of trade.
Mr. Jekielek: Yes. Is not comparable, so.
Mr. Bass: Yes. You’re going to get to a point where if the rationale for investing in China is a fear of missing out and we want cheap tennis shoes and we want cheap electronics. We can source those somewhere else for a little bit more money and deal with a regime that actually follows a rule of law and doesn’t commit genocides. And isn’t working every day, day in, day out to focus on their own global primacy without any regard to human rights or basic legal agreements and basic business etiquette. So there’ll be a time when, “Well, we had to invest because of its size, or we had to invest because of fear of missing out.”
Regardless of all of the line items that tell you it’s a bad investment. I think that is going to converge at some point in time in the near future. And look, I don’t know, if you saw the sociologist, Li Yi was speaking at one of the Beijing Communist Party schools, the main school, and he gave the rationale for why China’s invasion of Taiwan should happen now. And he said that they’ve learned a lot of things with regard to what happened in Russia. And the first thing they need to do is cut off Taiwan’s water supply, food supply, and cellular phones, because you can’t have pictures of what’s happening over there.
He says, “Especially the cellular phones.” And we need to hit them with overwhelming troops and firepower. You need to go read the speech he gave to the Beijing Communist Party school. That kind of thing is happening in the Communist Party as we speak. And Xi’s speech just this last summer, where he talks about the rejuvenation of the great Chinese race being his sole priority. He’s telling you it’s going to happen. Just like Putin gave the speech in the summer before Crimea in 2014 in the summer before the Ukraine, this year. Xi’s giving the same speeches to the Politburo. All we have to do is listen.
Mr. Jekielek: Yes, no. And in December, Putin made it very clear what his intentions were. That’s very true. So I want to go back to these statements about, “China, if you do the same thing in Taiwan, we’re going to do the same thing that we did in Russia.” Based on everything you just told me, that doesn’t sound like a very compelling threat.
Mr. Bass: So I would say it is, and here’s why. If we list their four big SOE banks, state-owned enterprise banks in China, we call them just U.S. money center banks. They’re similar to the Bank of China, Construction Bank. And then there are 12 joint stock banks. When you think about it, there are really 16 banks in China that run the show. I know there’s 10,000 or so on banks, but the real big ones run the show. So if we start sanctioning any of those banks and their payment systems like UnionPay and Alipay, U.S. investors will lose everything. So whether or not China can still move dollars around the world is not as relevant as every U.S. investor invested in China will have to mark everything at zero.
So the sanctions that we have on Russia will actually be more effective on China, as far as Wall Street’s concerned. Now, as far as how China operates, again, we need to be willing to really sanction things. We need to be willing to engage in secondary sanctions immediately for people that contravene our primary sanctions, which we just have been unwilling to do. 2018, we sanctioned the National Iranian Oil Company, The Republican Guard, the leadership of Iran. And as a country, we know exactly who’s processing the payments for Iranian and oil. We know exactly who continues to do business with Iran.
Interestingly enough, Western Europe does about as much business with Iran as China does. And so we haven’t been willing to engage in secondary sanctions, although we know exactly who should be sanctioned. So what we’ve got to do as a country is take the next step and make the sanctions real. Right now, there’re more headlines and they’re difficult for investors. But if we really want to effectuate change, we need to go all the way on sanctions and show that we’re serious because we still hold all of the cards to stop all of this, or to greatly reduce the killing, the raping and the decimation of what’s going on in Ukraine and what China’s likely to do to Taiwan.
Mr. Jekielek: So lessons from Russia. This is from the whole Russia-Ukraine war situation. We’ve been talking a little bit about that. I’ve been thinking about that a bit. For example, we’ve been talking a lot about supply chain repatriation. First of all, is there actually any capital flight happening or reduced investment to China? Obviously we know what happened with Russia now, but are people reading the tea leaves that way? And have you seen that?
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. You see massive redemptions coming out of China, as you should expect. There was an article in the Ottawa Citizen just a couple of days ago. I don’t know if you saw this. An opinion piece saying, “Why on earth are Canadian pension funds so heavily invested in China? They should divest.”
Mr. Jekielek: Great piece.
Mr. Bass: It was a great piece. And again, it was in the “Ottawa Citizen.” It wasn’t in the “New York Times.” It wasn’t in any kind of internationally renowned newspaper. But you’re starting to see people wake up and say, “What are we doing?” You and I have been talking about this for how long, Jan? And people are finally saying, “Wow, these guys are really bad guys.” And why are we invested there? Because we have so much negative complexity, we have so much downside risk and so little upside risk. Why are we there? And you think about the Shenzhen index over the last 10 years, pre-invasions. Let’s just talk before asset prices sold off.
The 10-year average compound annual growth rate of the Shenzhen Stock Exchange was 3.4 percent. The 10-year compounded return of the S&P 500 was 14.5 percent. So you want to invest somewhere where there’s a rule of law. You’re going to want to invest somewhere where there’s basic human rights afforded to the populace. You want to invest somewhere where you know your money’s at least safe, or do you want to invest somewhere in a despotic regime who won’t submit companies to real audits who can kneecap any industry he wants to on a whim?
He can say, “You know what? For profit education you’re done. Or tech I’m going to kneecap you. Or healthcare, you’re not going to do that anymore.” There’s so much negative convexity to being invested in a regime like that. And you’re not even being rewarded over a multi-year timeframe for taking those risks. It’s crazy.
Mr. Jekielek: Yes. No. And it’s also bizarre to me, I keep seeing headlines of the sort that the U.S. is threatening to audit Chinese companies and you realize, “Wait a sec, they haven’t been doing this all long?” Of course, we know that’s the case, but it’s still amazing to see that as a headline.
Mr. Bass: It really is.
Mr. Jekielek: But at this-
Mr. Bass: We entered into an MOU, a Memorandum of Understanding between the U.S. Treasury, The Securities and Exchange Commission, The Public Company Accounting Oversight Board and the CSRC, The China Securities Regulators. And we said, “You know what? You and any Chinese companies just don’t have to adhere to the same listing standards as everyone else in the world. You can use our exchanges, you can use our courts and rule of law to adjudicate problems. And you don’t have to submit yourself to audits. It’s okay.” Now, that was an ill advised agreement to enter into. The SEC and the PCOB can actually rescind that agreement. Each side can rescind that agreement in a 30-day notice. We need to send the notice.
Mr. Jekielek: Yes.
Mr. Bass: Send the notice.
Mr. Jekielek: Also on the lessons from Russia, we’re talking about supply chain repatriation. I don’t know if oil actually, you think of that in terms of supply chain. I certainly hadn’t, but isn’t Nord Stream 2 a great example of why you don’t want to have supply chains so dependent and in this case, it’s energy. It’s not supply chain, but it’s the same principle.
Mr. Bass: Yeah. It really is. Look, here’s something that I’m not sure we’ve talked about but when Schröder was the PM of Germany, back when Bush 43 took over, he was already implementing the denuclearization plan and basically projecting that Germany is going to have a major reliance on Russia for their energy needs. And Schröder was asked by leadership in the U.S. by some people I’ve sat with who said, “Don’t you think that’s a big national security risk?” Which he said, “No, no, no. We get along great with Russia. They are going to be responsible global actors. And we do a lot of business with them, we’re fine.”
Well, now, clearly that was a really bad bet, number one. Number two, Schröder is now chairman of Gazprom and on the board of Rosneft. You can’t even make that up. So what happened? Well, they bought him, that’s what happened. How do they not go investigate Schröder and Merkel for that matter? Because they all went along with it. And it was kindergarten 101 national security.
Mr. Jekielek: Yes. As we finish up, I want to talk about a few things a little closer to home here. I saw that you’ve been interested in the imports of these devices, Sears, that will basically turn handguns into automatic weapons… They turn handguns into automatic weapons. A lot of this stuff is coming from China and [in] increased amounts all of a sudden. It’s like the CCP has this approach of basically doing all sorts of different things to destabilize things, the fentanyl precursors are all coming from China in massive amounts. We have this huge amount coming across the border now. Tell us a little bit about that. Maybe the Sears, especially because this was something I just wasn’t aware of until recently. So I think you brought my attention to it.
Mr. Bass: Sure. So the picture of what you just said about creating chaos or sowing discontent, or actually putting things in the hands of people that kill other people. China’s been exporting 95 percent of the fentanyl to the U.S. We have over 55,000 deaths per year now due to Chinese fentanyl imports. The Chinese businessmen don’t engage in illicit trade knowing that if they get caught, they’ll be killed by their leadership. So I would think that their leadership is endorsing what’s going on and getting into the full out of Sear. All this is a very small L-shaped piece of metal.
It’s no bigger than the end of your finger. And what it does is it takes the recoil of a gun and immediately reloads the chamber and fires it—it’s a simple operation. And it’s not only handguns, it’s assault rifles as well. So that full Auto Sear can be used in both kinds of guns to take it from semi-automatic to fully automatic, meaning it can just shoot rapid fire. And so China, it takes nothing to engineer that. It’s an L-shaped piece of metal. It’s standard or ubiquitous in all guns. There’s no different sizes or shapes, they’re standard.
And so yeah, once China figured out that could really increase crime in the U.S. and cause more havoc, they started shipping them here. Now, it’s a felony to possess one, a federal felony, not a state felony. So it’s a real problem if you have one, but these criminals in the United States don’t care. They commit felonies every day. But as you know if you’ve read the articles, it’s become more of an epidemic. And so wherever China and Russia see places where they can create chaos, sow discontent and division, they’re experts at doing so.
When I look at what Putin’s doing, when he was turning Raqqa into a parking lot in Syria, if you remember, there was huge migration of Syrians into Western Europe when they were laying siege to the people of Syria. And when the immigration hit its peak, Putin increased the number of airstrikes there. You know what Syria looks like now, it literally looks like a wasteland, like Mariupol in Ukraine now. He’s leveling entire cities. I think Putin’s game is to force migration from these areas into Western Europe and destabilize Western Europe, just like China’s looking to destabilize the United States. That’s their game.
So whether it’s a full Auto Sear or whether it’s a thermobaric bomb happening in various areas, the game of Xi and Putin is to force migration into Western Europe and the U.S., and cause chaos to destabilize our countries. That is their game. And what you saw when Lukashenko decided to start creating flights from Baghdad into Belarus, he was weaponizing migrants. He was shipping so many Iranians into Poland, that Poland actually had to build a fence. Now think about how pro-immigration Europe is, and the EU, and Poland had to say, “We can’t do it anymore.”
So it is obviously their game. And these full Auto Sears are a real problem in the U.S. They will create more death, more destruction and more crime. And what we have to do is put people in jail for a long time. We have to enforce our laws. Unfortunately, we’ve seen those that have put in DAs that have been decriminalizing crime. And I think that we need to get back to some semblance of law and order. And even the progressive Democrats realize that they went too far with guys like Gascón and Boudin in L.A. and San Francisco. And the recall elections are being run by Democrats. So they’re starting to figure that out. But our country is being destabilized by foreign actors. That’s where you were going with the Sears.
Mr. Jekielek: Right. Well, or the foreign actors are exacerbating the internal divisions and stripes and ideology and so forth. I think you meant it’s Iraqis that are being flown.
Mr. Bass: That’s right. Flights from Baghdad into Minsk were created by Lukashenko and Putin one would think to destabilize Poland.
Mr. Jekielek: Well, let’s bounce back to China again. And so I guess in the China-Russia relationship, I definitely saw indications that… And the previous administration was interested in separating those two and bringing Russia closer. For example, that was my observation. Do you think something like that is even possible? Is that game over now?
Mr. Bass: That’s game over. If Putin were to take his toys and troops and go home, we can’t possibly let them back on the world stage for over a decade. Can’t happen. And so I think that ship has sailed. The pattern is set. The bifurcation of the two world orders is happening. They’ve even talked about the new world order. Well, that’s what it is. It’s the access of authoritarian and the rules based West. And they’re going to continually split. And the actions of the authoritarians are going to cause that split to just accelerate. It was already happening over time. You and I have talked about it for years, but what this did is speed it up.
Mr. Jekielek: Kyle, and just for the record, which of these regimes do you see as the biggest threat to America and this free world?
Mr. Bass: Yes. It’s clear to me that China is the biggest threat to the developed West and to the United States and let’s call it the free world. Russia is flexing its local power, but when you look at global trade, you look at integrated supply chains and you look at the size of the various fighting forces and the desire for global primacy, Russia doesn’t have a desire for global primacy. They’re just embarrassed that the wall fell and they’re trying to put back together Mother Russia. China’s goal is global primacy, and they’ve essentially set it in all of their internal documents from China, 2025 to the rest of the Politburo meetings. So I think China is definitely the biggest risk to the developed world.
Mr. Jekielek: As a final question here, you mentioned earlier in the interview about how we’ve been distracted from looking at China and what the Chinese Communist Party is doing. What is it that we should be looking at right now?
Mr. Bass: Twofold. We need to be vigilant about extending proper protections and removing strategic ambiguity and giving some clarity to the Taiwanese people. I think that is something that we must do. And something that even the head of the council and foreign relations of which I’m a member, Richard Haass said, “The time for strategic ambiguity is gone, we need strategic clarity on what our obligations are to Taiwan and their people.”
We also need to be focused diligently on the rollout of the Chinese Central Bank Digital Currency or the e-yuan. And the west needs to convene and we need to ban it immediately. You can’t have a little bit of cancer. You either have cancer or you don’t have cancer. That’s my view. And again, I know that sounds hyperbolic and maybe even xenophobic, but we can’t have U.S. individuals adopting the Chinese tech stack directly into their phone and having a line directly to Beijing themselves. We just can’t. We can’t allow that to happen from a national security perspective.
Mr. Jekielek: Well, I’m going to add another piece here because it just dawned on me. We’ve talked about TikTok before, right?
Mr. Bass: Mm-hmm (affirmative).
Mr. Jekielek: And I’ve had a guest on the show, Dr. Robert Epstein, who’s been showing us how the American tech companies are able to dramatically influence behavior. And in clearly surreptitious ways without basically anybody even knowing that their perspective on voting has changed or their perspective on buying something has changed. It’s incredibly powerful what basically big tech can do with this ubiquitous big tech like Google, Facebook, and so forth. And then we have TikTok, which is essentially at the bidding of the Chinese Communist Party. Now, connect that with the e-yuan, and what do we have?
Mr. Bass: Yes, we have a real problem. We were going to as you know ban/outlaw TikTok and several prominent venture capitalists billionaires in the U.S. called President Trump themselves, and said, “You can’t do that. That will ruin U.S.-China relations. China may just fold up and decouple, and that would cause the markets to crash and you won’t get reelected. So you can’t do it. Trump himself reversed the TikTok man in the 11th hour.
And so I think it’s important for us as a country to realize that having the Chinese Communist party’s ability to indoctrinate our youth, change AI algorithms ever so slightly for your homepage and actually change the way you think over time. They have that direct line into our kids now. So it’s a subset of the e-yuan and they can also give you benefits if you decide to use it. They can say, “Jan, for your first month of purchases, you get 25 percent off anything on Alibaba or JD.com.” That’s interesting. They could actually bribe you in the downloading, which would not be outside of the use cases of the Chinese government.
Mr. Jekielek: Well, because it’s not just a company, it’s actually part of an entire approach. That’s unrestricted warfare and we’re back full circle.
Mr. Bass: It’s asymmetric warfare, and they have the economies of scale with TikTok.
Mr. Jekielek: Well, Kyle Bass, it’s such a pleasure to have you on again.
Mr. Bass: Thank you. Pleasure to be here, Jan.
This interview has been edited for clarity and brevity.
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