“Chinese banking system is threatened by major crisis” – Private Businesses

It writes Kyle Bass, manager and founder of hedge fund Hayman Capital, in a letter to clients quoted by Bloomberg News.

Kyle Bass is one of the persons portrayed in author Michael Lewis book “The big Short “which filmed and recently had a theatrical release.

His fund invested great against the US mortgage market in 2007, which resulted in big profits while the world’s major banks wrote off more than $ 80 billion in losses related subprime loans.

the market letter estimates Kyle Bass, the Chinese banking system swelled tenfold over the past decade to the level of 3450 billion dollars.

10 percent of losses in relation to total assets, around 345 billion dollars, due to bad debts, would mean more than four times greater losses compared to the subprime crisis in the United States.

“What we are seeing is a restoration of the major macroeconomic imbalance the world has ever seen. The loans in China has reached its near-term limit and the Chinese banking system will undergo a loss cycle that will have profound implications for the rest of the world, “he writes, according to Bloomberg News.

As a consequence, the Chinese central bank, according to him, may need to press more than the equivalent of 1 000 billion dollars in new yuan to recapitalize the banks. This would proceed as hedge fund manager mean a depreciation of the yuan against the dollar is over 30 percent.

“the problems China is face has no precedent. They are so large that it will take every ounce of commitment by the Chinese government to correct the imbalances. Risky assets will not be the right port when all this happens, “he writes on.

His hedge fund has sold most of its risky assets during the middle and end of 2015. The fund has positioned itself in 18 months of “various events will likely lead the way towards the restoration of credit and the Chinese currency.” the fund has about 85 percent of the portfolio invested in China-related “trades”.

It is in China’s shadow banking system, which grew 600 percent during the last three years, the problems will first appear. When problems begin to be felt in lending that occurred “off balance sheet”, Chinese banks have to enter these in the balance sheet.

After Kyle Bass huge profits in the wake the financial crisis has been the performance of his fund has been more mixed. He has not got it right in tanks from 2010 to the Japanese bond market could collapse within three years.