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What's up everybody?
My guest today is Kyle Bass.
Kyle is the founder and Chief Investment Officer
of Hayman Capital Management, which is an
investment manager of private funds, focused
on global, event-driven opportunities.
Many of you will already know Kyle, either
from his appearance in Michael Lewis', "The
Big Short," or from countless media appearances
and talks that he's given over the years.
What's perhaps less widely known is that he
is also a founding member of "the Committee
On The Present Danger: China," which is a
nonpartisan group who's stated mission is
to help defend America through public education
and advocacy, against the dangers posed by
the People's Republic of China under the rule
of the Chinese Communist Party, which it views
as an existential and ideological threat to
the United States and to Western, liberal
democracies and values.
Regular listeners to this show will know that
I have devoted a number of episodes to China.
To understanding its banking system, to understanding
the complex web of relationships between the
Chinese Communist Party and its corporate
state champions, as well as to the vast Chinese
bureaucracy that governs over 1.4 billion
people.
And I think the reason why I felt it's important
to try and understand China, is because there's
been this narrative that we've been given
and which has proliferated over the last decade
or so, which essentially says that "we are
living in the Chinese century - that the future
is China - and that America is a receding
power, and that we need to accommodate China's
rise into the international order, so that
we can peacefully transition into a world
of continued prosperity."
And I think this narrative was acceptable
to people like me, because it also came with
the assurance that a Chinese century was not
incompatible with a liberal, international
order, and that China would either fold itself
into that order or that it would lead it.
Certainly it was never suggested that China
would overthrow that system, or that it would
build an entirely new one along more authoritarian,
or dystopian lines.
But I think the facts seem to undermine that
narrative, and I think that's why the crackdown
in Hong Kong is so disturbing.
It's why the Orwellian social credit system
seems so bewildering to those of us living
in Western, open societies.
And it's why I think we all have a really
hard time processing these reports published
in major Western outlets, like the New York
Times and the Wall Street Journal, about re-education
camps and crematoriums being operated in Northwestern
China, that are reportedly housing somewhere
around 3 million people who are not only being
held against their will as so-called prisoners
of conscience, but whose organs are, in some
cases, being forcefully harvested and sold
to people flying in on appointment for the
express purpose of having a transplant.
I just don't understand how that works.
And honestly I'm not sure I want to.
I think Americans and Europeans are starting
to ask themselves, "What exactly is a Chinese
century supposed to look like?" because it's
one thing to hand the baton over to someone
who more or less shares your governing principles.
But I'm not sure that this is really what's
on offer here.
And I'm not sure that many Westerners would
be on board with living in a world shaped
along more authoritarian lines, irrespective
of whether those lines are Chinese, American,
Russian, or anything else for that matter.
I think most of us can agree that adopting
China's model, would be a step in the wrong
direction.
But we need to decide what is most important
to us, both economically and morally.
Because the tools of 21st century totalitarianism,
or "instrumentarianism," as Shoshana Zuboff
has so aptly put it, bear little resemblance
to their 20th century analogs.
They are insidious, they are omnipotent, and
they are largely invisible.
And I'm afraid that their adoption would bring
about a world that none of us would ever want
to live in.
And with that, I bring you yet another timely,
and important conversation this week with
my guest, Kyle Bass.
Kyle, welcome to Hidden Forces.
Great to be here.
Thanks for having me.
It's really exciting having you.
Here you are.
You're not unexpectedly chill.
You're kind of...that's what I would've expected.
I usually have a certain...
I have expectations about what the guests
are like, but I know that they can deviate.
And usually I'm on target like 80% of the
time.
But there are times where I'm really off.
It's always interesting.
I try to hone that in.
So I was telling you that when I started preparing
for our conversation, of course, I focused
at the top on the Hong Kong dollar peg, and
China overall.
And of course global macro, global economy,
et cetera, financial markets.
But as I started digging in and preparing
more and more, I came to actually see that
the more interesting overarching theme is
that you and a number of other people are
part of this growing collective of individuals,
who feel that the framing of U.S., China relations
is fundamentally wrong, and that the only
thing that is effectively missing is something
along the lines of a George Kennan, Long Telegram
moment.
Where not only the diplomatic core of American
foreign policy, but also the population at
large can reorient to understand that we are
in fact in a new cold war with China.
Is that accurate?
I think it is accurate.
I think when you look at the Ascension of
China into the WTO in 2001, it changed everything.
And we allowed China to ascend, prior to its
ability really to ascend under this agreement
that we have with them, and the WTO has with
them, and the promises that they made as a
part and parcel for their ascension.
And to this day they haven't lived up to those
promises.
They don't live up to any promises they ever
write down.
But what's important, I think when you think
about how we engage with China, the first
question one must has to ask themselves today
is, "Why do we engage with them?"
And it's literal, meaning you have a country
that has somewhere between one and 3 million
ethnic Uyghur's in concentration camps, that
they call them re-education camps.
We in our intelligence edifice knew that something
was going bad there when we noticed crematoria
being built at each of these centers.
They're not electing a new pope every time
white smoke comes out of these things.
And so it's important for me to think about
how I frame my view of a regime like China's,
today.
Why do we interface with someone that takes
more than a million people against their will,
because of their ethnic or religious preference,
and puts them in camps.
And yet we can't wait to do another day's
worth of business with China.
We can't wait to chase the 1.4 billion people,
the allure of future profits, and economic
greatness, irrespective of their gross human
rights violations, their lack of respect for
the rule of law.
They don't have one.
They rule by law, not of law.
And truthfully, if people take the time to
read the facts that are out there, and try
to understand what China does on a daily basis
to subvert, take advantage of, steal, lie,
cheat their way through their relationship
with us.
What come away from the conclusion, I think
logically and think that we actually shouldn't
be engaging with them.
We should send them on their way.
So I do want to talk about some of the financial
parts of that.
You and Roger W. Robinson, and others have
done a lot of good work in fleshing that out.
For those who aren't familiar with what's
happening in Xinjiang, what are you talking
about?
So you know, it's been widely reported and
many of the journalists have tried to get
in to Xinjiang.
Xinjiang, they used to call it East Turkestan,
right?
And basically it's the Northwest corner of
China where they ethnic population is primarily
Muslim, and they're roughly 10 million ethnic
Uyghur's there.
China took that land over in 1949, correct?
That's exactly right.
When they drew that dotted line in The South
China Sea and took over.
I think it actually means, "The new territory",
in Chinese, is that right?
In Mandarin?
You're exactly right.
So Xinjiang is a province of people that don't
really look ethnic Chinese, they look more
like Tibetans, or Muslims.
And I think that what's happening is a full
cultural genocide there.
Meaning they're taking parents away from their
kids, they're putting their kids in remedial
grade schools.
They're bulldozing graveyards to remove any
kind of cultural attachment, or religious
attachment to the land.
And the rest of the world does nothing about
it.
And the reason the rest of the world does
nothing about it is because they can't wait
to invest another dollar in China, in the
hopes of making a positive return.
So what's happening in Xinjiang is something
that is reminiscent of what Hitler did in
Germany.
And I don't say that lightly.
When Hitler was asked what he's doing with
the Jews, he said, "Don't worry about it.
They're less than 1% of our population."
When China was asked about what they're doing
within ethnic Uyghur's, in Xinjiang, they
said, "They're less than 1% of our population.
Nothing to see here."
They said exactly what Hitler said.
Well.
Also, another thing that they're doing that
we haven't talked about is the organ harvesting.
Which is so horrific, that I think that's
a parallel with the Holocaust in that it's
difficult to imagine it.
In other words, during the Holocaust, there
were Jews that were coming over from Europe
that were telling Americans what was happening
in Nazi Germany, and it wasn't that people
didn't believe them, they just couldn't imagine.
It seems like something similar is happening.
You're exactly right.
One of the horrors that is happening in Xinjiang
today, is in organ harvesting.
If you go onto the internet and just type
in Chinatribunal.com, the UK just concluded
a tribunal run by one of the top lawyers in
the UK, the QC.
And he was the person who oversaw Slobodan
Milosevic's war crimes trial in the Hague.
So this is a bonafide, deep dive into investigating
the organ harvesting phenomenon in Xinjiang,
and in China.
And basically the conclusion of this tribunal,
if you read the summary, I think it's roughly
25 pages.
They talk to doctors that left because of
what the horrors they saw.
They talked to people that have escaped.
They've talked to service providers.
And it was 200 plus people they interviewed
for this tribunal.
And what the tribunal concluded is they actually
tissue type and blood type everyone that they
bring in.
They call them prisoners of conscious.
But we can just say the people that are taken
against their will and putting in concentration
camps.
And they are actually paralyzing them.
While they're awake, they're ripping their
breastplate open and taking whatever organs
they need to take, while they're awake.
It's got to be the most horrific way to die
you can ever imagine.
If you could choose to die, I would choose
to be in the gas chamber before I'd let you
rip my kidneys out of me while I was awake.
So this is happening.
The waiting list for an organ in China is
three days.
The waiting list for an organ in the U.S.
is a year and a half.
And to your point, it's so hard to imagine
because we don't have pictures, we don't have
videos.
So I think what you just said actually was
what drove it home for me.
Was that in an interview that you did with
General Spalding, that he said he had a contact
in Israel, a doctor-
Yes.
... whose patient came to him and told him
that he was flying to China for a scheduled
organ donation-
In a month.
... in a month.
And the doctor was stunned because he said,
"How's that possible?
You can't schedule an organ donation."
[crosstalk]
You can't schedule a heart transplant, right?
... a heart transplant.
That's what brings it home.
The fact that you can schedule that, it means
that there are people that are being harvested.
It's why the Israelis immediately banned organ
tourism to China.
Hmm.
All right, so we're going to circle back to
this.
I just wanted to give some context at the
start, but let's actually kind of circle back
to Hong Kong, because that's also the most
timely crisis.
And I think also what's interesting about
Hong Kong, is that it puts into focus what
a world in which China's authoritarian model
pushed upon open societies would look like.
Hong Kong is not a democracy, but it is a
liberal, Western society in its orientation.
A lot of that has to do with its relationship
to Great Britain, but also the crisis continues
to escalate.
We've covered it on this program, on a number
of episodes.
We also had Joshua Wong on the program.
And I think Sunday there was someone who was
shot, I don't know if he was killed, in the
streets of Hong Kong.
I saw a video today of a woman, pregnant woman
being pepper sprayed.
There is nuance, obviously.
I'm sure it's difficult for the police as
well in this situation, but what are you following?
What are you seeing, and what is the situation
now in Hong Kong?
Yeah, Hong Kong it's such a difficult thing,
again, for people in the U.S. to understand.
But imagine if you lived with a basic law,
a Western rule of law, like Great Britain's
for the last call it hundred plus years.
And then all of a sudden the Chinese Communist
Party was going to remove those freedoms and
was going to do it in one fell swoop, and
basically tell you that they can extradite
you to China, just based on an allegation
by the government.
There'd be no judicial oversight, no judicial
review.
Just a rubber stamp, a perfunctory stamp.
These people have been living in Hong Kong
for decades, and now all of a sudden out of
the blue, they're having communism thrust
upon them.
And the fact that Carrie Lam has now recently
invoked, the Emergency Ordinance Act, allows
them to take property, to take your bank account,
to incarcerate you, where you have no legal
or judicial recourse.
Basically it's martial law.
And I think the youth of Hong Kong are fighting
for their lives, something they thought they'd
be doing in 2047.
So you probably know, back when Margaret Thatcher
and Deng Xiaoping negotiated the handover
of Hong Kong back to the Chinese.
That negotiation happened in 1984, and that
deal was signed with the UK in '84, and then
in '92, the U.S. basically set forth our governing
agreement, the Hong Kong Policy Act of '92.
And so we thought that China was going to
leave Hong Kong alone, leave the British law
in place, leave the rule of law in place,
basically allow free and democratic elections
in every position except for the chief executive
who China gets to choose.
And what we see happening, is not 2047, it
happens to be 2019, and it's happening right
now.
For listeners who haven't heard our episodes
with Ho-fung Hung, or David Webb, I suggest
you listen to those.
We go into some details about the history,
particularly with Ho-fung Hung.
How do you feel this narrative is currently
being spun in mainland China?
And how much control does the CCP have over
the views and opinions of Mainlanders in your
estimation?
Look, the rhetoric coming out of the mainland
China accounts on Weibo over the weekend was
really sickening.
That young man that was shot point blank in
the chest, no weapon, nothing in hand, was
walking towards a police officer that had
someone else detained, and was just shot in
cold blood in the middle of the street.
And we see this on video, so we're not having
to interpret something that I read.
But the mainland Chinese said he deserved
getting shot, and they should shoot all of
the Hongkongers.
That they have it too easy, and the mainland
Chinese...
You asked me how it's being spun.
So if you look at the rhetoric in Mandarin
that's coming through CCTV, and the China
Daily, and Global Times, you'll see that the
narrative that's being spun on the mainland
is the Hongkongers are causing all of the
riots.
And then many of the cases, they say the U.S.
And our intelligence agencies are the root
cause of all of these problems.
And by the way, as we all know, communist
government controls the narrative.
They control the press, they control the police,
they control the printing press, the money.
And so the Chinese government is masterful
at developing narratives.
And by the way, they project those narratives
all the way over here with their "news organizations",
which are just propaganda outlets.
Mm-hmm (affirmative).
So how is this impacting Hong Kong's economy
at the moment?
Yeah, Hong Kong's economy is falling off a
cliff.
If you look at real estate sales, if you look
at GDP.
By the way, it's only going to get worse and
worse, because of what we're seeing in, call
it the last five days.
Worse and worse, because of what we're seeing
in call it the last five days.
If I told you a year ago, if I showed you
a picture of what happened at the Chinese
University in Hong Kong last night, and I
said this is in Hong Kong one year from now,
you would throw me out the window.
You would say that will never happen.
And here it is happening today.
It looked like a war zone in Beirut back during
the civil war, right?
So I think what's important to understand
is you have a generally peaceful population
of only seven and a half million people, and
you have riots happening on a daily basis
now, whose intensity continues to multiply
and worsen, and you have the Chinese government
and their Politburo Standing Committee member
that's in control of the Hong Kong affairs
tell you that it's about to get uglier.
So I want to bring in your thesis on the Hong
Kong dollar.
When did you begin to develop this?
So let's talk about Hong Kong in general.
So I won't talk about the positions or anything
that we do for FCC rules.
But I will talk about as far as our interest
in Hong Kong began three years ago, and our
investments in Hong Kong began two and a half
years ago.
So one could say we had a little bit of foresight,
it wasn't too hard to see that this was going
to come to a boiling point.
Truthfully, it's happening sooner than we
thought.
But Hong Kong has a severe financial disadvantage
that used to be an amazing advantage.
And what I mean by that is you just back up
10 years, and first of all, back up 36 years,
back when they pegged their currency to the
US dollar, when you peg your currency to another
currency, you're basically letting, I say,
let Jesus take the wheel.
You're really letting-
I like that expression.
... the central banker of the country you're
pegging to, you're basically seeding your
monetary policy to him, or her.
And so basically Hong Kong has essentially
no control over its own policy, I.E., because
if you don't move your interest rates exactly
with the country that you're pegging to, that
will create capital flows one way or the other
and your peg will break.
So you have to basically keep your rates almost
identical to avoid capital flows one way or
the other.
Either stronger or weaker.
And so when you're seeding your control of
your monetary policy to another power, you
must have synchronicity in your economy, I.E.,
if our economy is growing, and theirs is contracting,
and we're raising rates and they have to raise
rates while they're contracting, that is the
worst possible thing that can happen to an
economy.
Especially if they have a very leveraged private
sector and banking system.
Exactly.
And what's important to note specifically
with Hong Kong is they just had the best 10
years they will ever have, I.E., 2008 the
United States goes into a financial crisis.
We drop rates 5% to zero.
And Hong Kong goes along with us, and drops
rates to zero, at the time in which their
one trading partner, China went to the gas
pedal and started growing double digits.
So what happens when you have free money,
and your number one trading partner's growing
GDP at double digits, you have money flying
over the walls, you have real estate going
up exponentially, which it did.
It's gone up almost 800% in 10 years, I mean
in mass.
And so when you have the best 10 years of
your life, then you get to a point where you
have the converse, and that's what's happening
today.
You have a banking system that's levered 900%
of its GDP, I.E., if you remember when Ireland
and Iceland and all of the European economies
that fell like dominoes in the European financial
crisis.
I would say the number one common denominator
was the amount of leverage in the banking
system as a percentage of GDP.
So when bank loans start to go bad, they break
the whole country.
And so Hong Kong is at a level that you saw
Iceland and Ireland at, at 900% of GDP.
The other side of the story there is to your
point, is private sector leverage.
So private sector credit to GDP is 300% in
Hong Kong.
To put that into context, both the US and
Japan, one would say the US and Japan are
two of the most levered private sectors in
the world, we're at 150.
And so now you have an economy that's tanking,
and the travel services deficit is exploding.
And everything in Hong Kong is coming to a
standstill, and you're doing that in the most
levered, most expensive economy in the world.
One of the reasons also, you're seeing the
youth, I think act in the manner in which
they're acting, and this is happening all
over the world, with interest rates at zero
globally, asset prices become very high.
So an unintended consequence of central bank
money printing is the rich get much richer.
The middle-class has to rent those assets,
and pay such high rent levels that they can't
afford it anymore.
And there's no upward mobility, because things
cost too much.
And so what you're seeing in Hong Kong is
median home price to median income is 21 times.
In the US at the peak of our subprime greatness,
we got to six and a half.
So there's really only one way to go in Hong
Kong, and it's fundamental restructuring of
their economy.
So let's connect the dots here, because this
is an important element.
Let's connect the dots to the peg.
Now the Hong Kong Monetary Authority says
it has roughly 400, the last number I saw
was 436 billion US dollars of foreign exchange
reserves to protect the peg.
Your calculation puts that actually at 57
billion of what can actually be used to viably
defended it.
I want to also connect the dots to why it's
important that there's so much leverage in
the banking system in the private sector,
and what the implications are for that if
Hong Kong had to raise interest rates in order
to defend the peg, if they ran out of foreign
exchange reserves.
And maybe where you can also compare this
to some other instances of currency pegs breaking
like in Thailand or in Argentina for our listeners.
So, how long is this show?
Well we've covered them a little, we've covered
them a bit in some prior episodes.
We did one for listeners with Barry Eichengreen
that you should listen to where we covered
some of these peg breaks.
We also did one with Robert Johnson when he
and Stanley Druckenmiller and Soros shorted
the Bank of England.
So those are some examples to listen to, but
just sort of give us your best analysis of
it.
Sure.
So for those of you that have a deep acumen
in financial markets, we've recently seen
fed funds, and a problem in the US funding
markets where we saw the Federal Reserve sets
the rate range for fed funds, and then we
saw fed funds spiking hundreds of basis points
in the US, and for the United States economy,
that actually scared a lot of people as to
what was going on.
The repo market.
The repo market.
So again, this is a little bit of an Archean
concept, but it's going to answer your question
in another way.
In the US, we had 4.
6 trillion on the Fed's balance sheet at the
peak, their desire, their publicly stated
desire was to get it down to somewhere around
two and a half trillion.
We wrote a piece in May of this year that
basically stipulated that there's this thing
called the Basel III liquidity capital ratio,
and this basically maintains that banks need
to have a certain amount of liquidity on their
balance sheet in case we enter a recession,
or there was a run on the banks.
They raised those liquidity coverage ratios.
So Basel III, Dodd-Frank has these liquidity
coverage ratios that are required of all banks,
and the only way to satisfy that as basically
one of two ways.
You either have government bonds, or you have
the cash that you have on deposit at the Federal
Reserve, both of those can be used as that
allowable collateral for the LCR.
What we said in May was that the Fed can't
get its balance sheet much below three and
a half trillion, because then the available
collateral in the system, given the leverage
of our system and the size of M2 will actually
disappear.
And the Fed would have to go into action.
And people said we were crazy in May.
And now, people understand that that's true.
That comes back to Hong Kong.
They said they had around 435 billion, they
had 20 billion run in one month in August.
And that was the biggest draw down since the
pegs beginning 36 years ago in Hong Kong,
since the imposition of their currency board.
So what's important to note about that, again,
what we look at is there's a certain amount
of reserves out there, but there's a finite
amount of usable reserves.
You can't use cash that's on deposit at your
central bank from other central banks.
You can't use private equity and ports and
things that you count in your assets as a
government, but you can't defend your peg
with liquid assets.
And so we make a number of adjustments and
came to the conclusion prior to that number
in August, is they had about 57 billion, we
think that number is about 35 billion now.
By the way, we don't know what happened last
month, and we don't know what's happening
this month.
But I can tell you it's probably not inflows,
right?
So what's happening is their system that's
highly levered is shrinking.
And that's just like quantitative tightening,
right?
When reserves leave, it's quantitative tightening.
And that's what the majority of the participants
don't quite understand.
But if you have a quantitative tightening
anymore, you're going to have rates move in
a big way.
So today, the Hong Kong interbank market on
the one month side is much higher than the
US market.
And on the one year side it's also higher.
And in overnight it's actually materially
higher today.
It's 40, 50 basis points higher.
And that would tell all of us that things
should be okay, over there, I.E., in the capital
flows because their rates are higher than
ours, they're earning a little better of return.
So therefore money shouldn't convert to dollars.
The problem is money is converting to dollars,
and money's leaving, and so you're having
a quantitative tightening in the most levered
developed country in the world.
Oh, and by the way, there is no doubt that
they'll have a banking crisis going forward,
because you have a highly levered economy
entering a recession.
We all know what happens then.
And aren't you seeing some indication of that
in either Chinese banks that are based in
Hong Kong, or Hong Kong banks that are raising
deposit rates?
Yeah.
You have done your work here.
Oh, I always do.
You have done your work.
So yeah, it's fascinating because it's only
for new money.
So it's a very interesting way for the Chinese
banks and even the banks in Hong Kong to try
to attract foreign exchange reserves in, without
having to raise the rate on all of their existing
money.
Because again, that would break them almost
immediately.
And the mortgages in Hong Kong, all the real
estate loans, all the mortgages are indexed
to one month overnight, the high bar rate,
and they reset every month.
So imagine if you didn't know what your mortgage
payment was going to be every month, especially
if rates are really-
They have to keep rolling that over, and they
are perpetually short dollars.
That's correct.
And so the real issue here is for instance,
one week ago, the Hong Kong banks were trying
to attract Australian dollars.
Again, anything that they can spend, they
can't spend Chinese money, so they can spend
any other FX.
So they were willing to pay 11% for seven
day money, on new money.
And so that goes also to show you that there's
a pretty big panic going on already.
It's a precursor to a banking crisis.
So I also love that you mentioned the repo
market.
I do want to try and touch on that towards
the end if we can, or in the overtime.
I think the monetary base got something close
to $250 billion shy of your target of 3.5
before we started seeing hiccups in the repo
market, because I think that is a really interesting
story, but what does all this mean for China?
Because Hong Kong is so important to mainland
Chinese, particularly the elites who have
used it as a way to get their money out, but
also for Chinese corporations that are based
in Hong Kong.
They've also used Hong Kong as a way of raising
external capital, which is something I really
want to get into, because those numbers are
remarkable.
And honestly, like I told you, I have to prepare
for an episode in order to cover a subject,
and I really was kind of blown away by the
number of companies that operate either on
exchanges in the United States or OTC.
And Robinson's done a lot of really useful
work in that regard that I looked off of,
but sir, that's my kind of general question.
Yeah.
Look, I think that Hong Kong is China's golden
goose.
It's where they raise the majority of their
US dollars globally.
And again, China is desperately short dollars.
They're short energy, they're short basic
materials, they're short base metals.
They are short food.
They have to import all these things, and
they have to pay, they can't pay RMB for it
because no one takes monopoly money.
They have a closed capital account.
Yeah, they have a closed capital account.
So they need to attract dollars one way or
the other.
They can either borrow them, they can get
people to invest in their companies, and list
them on the Hong Kong exchange for dollars,
where they can steal things.
But the bottom line is, Hong Kong is the conduit
for the Chinese to raise money, but what's
more important to the Chinese right now is
maintaining power.
And maintaining power supersedes any of these
other things for China.
And so that's why we think that you're going
to see a banking crisis.
It's already set to happen.
Like there is no saving Hong Kong's economy.
Their banks are going to blow up.
And when you have something that's this tightly
wound, and you have a business decline, as
rapid as we're seeing there, there is no putting
Humpty back on the wall.
The question is, will that affect the currency?
Will that affect the exchange rate between
Hong Kong and the rest of the world?
And that's an open question today.
So then there's another question also that
I think is operative, which is what happens
politically in such a situation, right?
Politically in which country?
In Hong Kong.
Well obviously this is a difficult subject
to cover, right?
Because it's one country, two systems, or
supposedly two systems and all of this is
in flux.
What does a banking crisis in Hong Kong mean
for the current political crisis between Hong
Kong and the mainland?
It just makes it more difficult.
Look, it's our view that you're going to see
Carrie Lam replaced.
I mean, it's interesting.
She's lost the respect of her people.
She's lost the respect of Beijing.
I mean she's finished.
She's in a bad situation.
She is finished.
So the question is, who do they replace her
with?
And it'll likely be a Beijing hardliner.
They're already talking about implementing
Article 23, which is as you know, the sedition
rendition, a national security law that is
way worse than the extradition bill.
It's kind of the comprehensive martial law
bill that basically puts China in charge.
But you say what'll happen politically, in
the end, Hong Kong will just be another city
in China.
You think that's inevitable?
Well, we know it's inevitable in 2047, the
question is it inevitable in 2020?
And I say given the escalation of what we're
seeing now, the fact that the emergency ordinance
resolution's been enacted, I think it's inevitable
that is in 2020, it will be Hong Kong, China.
And I think we got a window into the mindset
of the CCP and their commitment with the NBA
situation.
I think that the level of sensitivity to the
speech of NBA coaches and players, I mean
if they're that sensitive in that situation,
it's hard to imagine how they would ever allow
the situation in Hong Kong to continue, which
again, that's disturbing for the rest of us.
On the one hand, the question is also to what
extent should and is American foreign policy
trying to support the people in Hong Kong?
I know there are some legislative initiatives
being put forward by people like Marco Rubio
and others are being pushed.
Maybe the 1992 status will be revisited, but
I think it's disturbing, and this brings us
into kind of the larger conversation, which
is this reframing of the US/Chinese relations.
And one of the things that I touched on, and
maybe this'll be an entry point, is really
the extent of which the CCP has been using
US capital markets to fund its foreign exchange
reserves, its current account.
Can you kind of flesh that out for our listeners?
You ask some really tough, long-winded questions
that have very long winded answers, but the
bottom line is China used to run a very big
trade surplus with the rest of the world.
That's how they built up their, call it 4.6
trillion dollars worth of reserves on their
balance sheet.
And now they say it's three, we think it's
closer to two, and that's a working capital
number that they need to operate with.
So what they're doing around the globe is
everything they can to borrow or issue equity
in their companies, because money's fungible.
So if a, let's say Tencent issues a bond and
in the US, or a gas exemption, or they issue
a bond in Hong Kong, that money, those dollars
actually go to China, INC.
They don't really go to Tencent.
Because these are state champions.
Yeah.
Well also because it comes into the Chinese
central bank, they can show it on Tencent's
balance sheet, but they can go use those dollars
somewhere else.
I.E., the government can.
And so I think it's important to note that
the Chinese companies have borrowed 1.1 trillion
dollars-
Is that a BIS number?
The BIS number over the last just five years.
It's gone up exponentially.
And now you're seeing an intense desire for
Chinese companies to list in Hong Kong.
And then I don't know how many people you
know that own companies like Alibaba, or Tencent
listed on the US exchange, but you don't own
anything.
You own a share in a variable interest entity
in the Cayman Islands.
That is a tracking entity for that in China.
So if things went poorly, and you thought
you owned a share of a company that had some
sort of value, you actually own nothing, and
people need to understand that.
Can you flush that out a little bit more?
What do you mean when you say that?
If you buy a share of Alibaba today, if you
pull up your IRA or your trading account or
whatever you do for your savings, and you
tell E-Trade or you're a broker at Merrill
Lynch or whatever, Goldman Sachs, you say,
buy me some shares of Alibaba, the one listed
on the US exchanges, right?
B-A-B-A, right?
You're buying an ownership interest in a Cayman
Island entity.
It's called a variable interest entity, a
VIE, and that has no claim to the assets in
China.
You're basically just saying, I'll buy this
thing because other people are buying it.
And Alibaba does all of these things around
the world and has a big record sales day over
the weekend.
But if in the event of a financial, let's
say a financial problem, and let's say they
have a bankruptcy, you, the American shareholder...
... have a bankruptcy, you, the American shareholder
of Alibaba don't own a thing.
How do regulations not protect investors from
this?
So, that's the best question you've asked
all day because the importance of how China
manipulates our markets, we entered into an
agreement, the PCAOB, which is the Public
Company Accounting Oversight Board here in
the U.S., entered into an agreement 2013 with
the CSRC, which is China Securities Regulator,
and we agreed to not force the Chinese companies
to submit themselves to covered audits.
So, today, those companies like Alibaba and
Tencent and many others don't ever submit
themselves to an audit like U.S. companies
do.
U.S. auditors aren't allowed to review this.
Which is crazy when you hear it for the first
time.
It's like, can you believe this?
So i.e., Chinese companies are raising money
in the U.S. from unsuspecting U.S. investors
without a basic covered audit and without
being Dodd-Frank compliant like all the U.S.
companies have to do.
Well, some of this was covered in the documentary,
The China Hustle, which I saw, which was remarkable
that they were actually bringing investors
in to some of these factories.
They were making them run while the investors
were there, and then, when they were leaving,
they just-
Turn them off.
... turn them off, which is absolutely remarkable.
Yeah.
I mean, look, they did it in Sino-Forest.
A lot of people lost a lot of money.
Imagine how much fraud is really there if
you were to audit these things, and so, it's
our view that the United States should implement
Rubio's Equitable Act.
An Equitable Act should just stipulate ... Again,
this isn't anti-China.
This isn't saying we're going to cut off capital
flows to China.
We will say China, Ecuador, you name places,
Venezuela, if you want to list companies here,
we might even overlook your political dysfunction
and your gross human rights violations, but
if you want to list a company here, you're
going to have to bring it up to U.S. securities
law compliance.
God forbid that we level the playing field
here in the U.S. to foreign companies.
I mean, that should be a given.
One thing that many investors also don't know
is when foreign nationals, let's say Chinese
people, invest in the U.S., let's say they
invest in Uber and they make half a billion
dollars or they invest in Intel and they make
several million dollars, when they sell it
and take their money back, they don't pay
any tax.
So, what's also very interesting is they use
our legal system to adjudicate grievances,
and they pay nothing into our judges or our
system.
There are some inequities out there that must
be rectified.
So, here's the question.
How did we get this?
How did this happen?
How did we get to a place where the regulations
have been written in this way or being gamed
in this way and that Chinese companies and
the CCP have had their way with America for
so many years?
Look, we allowed them in the WTO in 2001.
We assumed our state department, our president,
our presidential edifice, we all believed
that if we allowed them to taste Western capitalism,
that they would liberalize their capital account,
they would liberalize their economy, they
would become more Western.
Even George Soros has recently said that we
gave them the benefit of the doubt, and they
blew it.
Davos speech 2018.
Two weeks ago, he actually was more punitive.
I don't know if you saw it.
No.
He said we gave them the benefit of the doubt,
and we were wrong.
They went the other way, and he said, " China
is our mortal enemy.
As soon as we realize this, we'll be able
to set policy going forward."
So, this is a guy that has spent his entire
life investing in the Open Societies Foundation,
he is a massive proponent of globalization
and free trade, and here is the poster child
for globalization telling you that China is
our mortal enemy, and we must act.
That speaks volumes.
The Chinese ... I say the Chinese, it's sort
of a stand in for the Chinese elite, the governing
council, what I think you or Bannon call the
cadre.
Yes.
They have used money and Americans' greed
as a lever to manipulate U.S. foreign policy
in their direction.
When we're talking about companies, I also
want to note that I think a figure I saw was
something around 700 companies are listed
either on U.S. exchanges like the NYSE, NASDAQ,
and over the counter markets.
A lot of these companies are companies that
I think most Americans would not want to invest
in if they knew what they did, companies like
Hikvision, which make the surveillance technology
that's actually used in some of these concentration
camps that we just talked about.
That's right.
Or China Shipbuilding, which actually builds
military submarines and other-
Aircraft carriers.
Aircraft carriers.
Yeah.
AVIC, same thing with aerospace equipment.
These are military companies.
That's right.
They're using American markets to fund the
development of the Chinese defense system.
It's truly shocking, but you know, even amongst
my friends that are professional investors,
when I bring a prospectus or I show them what
the offering was ... I mean Xinjiang, as a
province, came to the U.S. and sold $200 million
worth of bonds.
I read that.
It is unconscionable.
They used that money to build the camps.
They used that money to build ... Well, not
only that, the World Bank who the U.S. taxpayer
creates their AAA credit rating, the World
Bank lent Xinjiang 150 million for education
purposes, and I don't know if you saw recently
in Foreign Policy magazine, they called them
out.
So, I did not see that, but I want to kind
of find a way to reiterate something and circle
back on this point that I made at the very
beginning, which had to do with the long telegram
and the sources of Soviet conduct.
As I engage with this material more and as
I speak with you, I again come back to this
point that I think perhaps the fundamental
problem for the public is the existing framing
that they have in their head about what this
relationship is because no one wants to actually
shift.
It's a big, big shift to go to a place from
thinking, this is a relationship that we can
make work, we can bring them into the liberal
international order to one where this, the
core parts of the PLA and other parts of the
CCP have never been and are not interested
in peaceful coexistence with the United States.
I think Spalding said that, "They want to
dominate us."
I mean, there's a lot of great stuff in the
interview that you did with him.
I think it's available on Real Vision-
It is.
... where he talks about private conversations
that he's had with members of the Chinese
People's Liberation Army.
I'll step in here and say you're talking about
the schism that exists, right?
There is a schism and it's between ... If
you would just put it on two sheets of paper,
what you see is there are two schools of thought
in the U.S. today, and if you look at the
Intelligence Authorization Act of 2019, which
was the appropriations bill that had to be
passed to fund our intelligence universe here,
in the Intelligence Authorization Act of 2019,
they list what they call hard target countries
that we as a country are desperate to guard
ourselves against and to work against, China
being one of them.
So, our intelligence apparatus tells you China
is one of the four countries in the world
that we think is an enemy of the United States.
Our military says China is the number one
risk to our military over the next 20 years,
bar none.
Nothing's even close.
Our Security Council, National Security Council
thinks China is our number one enemy, and
we work day and night against it, and yet
the other side, let's say the other faction
in the United States is Wall Street, and Wall
Street and its many ways ... and I mean that
corporate America and Wall Street are the
two biggest lobbying firms for China, right?
You have the billionaire CEOs that do business
in China.
You have the Wall Street firms that can't
wait to issue another IPO for a Chinese company.
They see fees, and they see paychecks.
The U.S. population has been lulled to believe
that cheap t-shirts and electronics from China
are a good thing and that if you want cheaper
Nikes, you're going to have to have them made
in China, and Nike for all stretch, all intents
and purposes would love to keep making cheap
stuff in China.
The problem is, is that fundamental schism
between what are China's intentions, how do
they operate, how they interface with us,
and then to your point, you said they use
our greed against us, they use capitalism
against us, they bribe the few, and they're
really good at it.
What I mean by that is they'll take some billionaires,
and they'll give them special access.
They'll say, "You get a casino license.
You can sell cosmetics here."
Now, it's not a direct bribe, but they get
access, they make billions of dollars, and
they become the biggest cheerleaders of China.
They're also becoming educated.
Yeah.
On the party line.
They're also then lobbying the president of
United States and Congress on China's behalf,
and they do it all the time, and so, that's
the schism that exists.
Those are the groups of people.
So, I actually want to drill in deeper here
on this point.
So, one of the things that came to mind when
I was preparing for this was the relationship
between the schism that existed also in the
United States in the interwar years leading
up to and then through World War II between
some of the industrialists and financiers
in the country and American foreign policy
and military policy.
Something similar perhaps is beginning to
happen here, and then also, there's something
else, which is that the battle lines, the
way that we think about war in the 21st century
is very different.
Now, there's always been information war.
Cyber war is something new, altogether new
and very scary.
For listeners, we've covered that in great
detail, particularly during our episode with
Bruce Schneier, but there's also economic
warfare.
That's something that, again, to bring back
Robinson, he's talked about his experience
in the Reagan administration and the use of
economic warfare against the Soviets, and
his contention is that this is exactly what
the Chinese Communist Party is doing to the
United States.
How do people wrap their minds around this
problem because things are shifting so much?
The way that we think about war is shifting,
the way that we think about our liberal capitalist
system in the context of, let's say a potential
threat, all of this.
I mean, how do you begin to wrap your mind
around this, and how do you help the people
that you speak to come to this reality?
You put it succinctly and properly.
I think there are four kinds of war today,
and we're fighting three of them with China
as we speak.
So, you mentioned cyber war.
As you know, they attack all day every day
from PLA installations.
So, cyber war, we're definitely fighting with
China.
The narrative war is actually a big one, influence
pedaling, and they are able to project their
narratives to the United States through people
they provide special access to or through
their "news media," which is propaganda.
Here, they're delivering free China Dailies
out in Berkeley.
They just give it away and hope people read
it.
So, you have cyber war, you have narrative
war.
Then, you have, as you're saying, economic
war.
An economic war can be, something I've really
never talked about publicly that we'll give
you here on the show, is the one thing that
they're so good at is putting U.S. industry
out of business.
As you probably know, the generic drug business
is almost 100% in China now.
Fentanyl
There are drugs that are absolutely mission
critical drugs here like heparin for dialysis
patients, and that's 100% made in China.
They could just stop sending it to us, and
we'd be in a real problem very quickly, but
even worse than that is the people that are
sequencing genomes here in the United States,
let's say you go to 23andMe or you go to ancestry.com
or you just want to pay to get your genome
sequenced, there's a Chinese company called
BGI that does the overwhelming majority of
all the sequencing of U.S. genes.
There are other Chinese companies that are
all the backbones of any of the U.S. genomic
sequencing companies.
China has the genomic sequence of every single
person that's been gene typed in the U.S.,
and they're developing bio weapons that only
affect Caucasians, which is crazy.
The way that they did that-
Really?
This is-
I have not heard that before.
Right, so what's important to note is, how
did they get there?
What they do is ... So, one of the genetic
scientists in the world that is a friend of
mine, his name is David Mittelman, he works
at a company called Othram, but for 25 years,
he's been sequencing genomes.
He's known in the business as one of the best
in the world, and David has brand new equipment.
He's been doing this his entire life, and
he tells me that there is absolutely zero
chance that someone can sequence a genome
for less than, call it 1,400 bucks or something
like ... I don't know the exact number, but
the Chinese company, BGI will sequence your
genome for 1,200 bucks.
They're subsidizing it?
That's how they got all the business.
Because they want that information.
They can undercut every single company in
the U.S. because it's state driven.
This is how they put our aluminum business
out of business.
This is how they went after our steel business.
This is how they go after our drugs, right?
They're going after our genomic data.
They already have it.
No one knows this, and we're going to write
about this but-
Wow.
Go look.
Choose the sites if you go look to sequence
your genome, and get into the websites of
these companies, and look at your options,
and you'll see who's actually sequencing your
genome.
Wow.
Interjection for people that are interested
in learning more about this, how can they
do that besides going to some of these companies?
Well, I mean, we haven't written it up yet.
[crosstalk] Got it.
Okay.
All right.
So, we'll look for that.
I think, and that's just one example.
We'll look for that.
You asked, how did they do it?
Sure.
They subsidize businesses they want to take
over, and they'll operate at an economic loss.
We won't.
We can't.
Right.
Right?
So, we have to stop these things from happening.
Okay.
So Kyle, I'm going to move us into the overtime
where we're going to discuss this in more
detail.
I want to ask you more about what you know
about what's happening behind the scenes in
Congress with policy, what policy might be
implemented to work around this.
I also want to get your thoughts on the 2020
election if you think ... because it seems
to me that it's become a bipartisan issue,
right?
I think the one thing that a lot of people
can agree on across the aisle is that the
Trump administration and Donald Trump's rhetoric
might've been the only way to get to this
point where we start to have a national conversation
about this and shift the focus.
I agree with that.
So, I want to ask you about that.
I also want to talk in more depth about technology
and supply chains, 5G, Huawei.
For listeners, we did an episode on Huawei
with James Mulvenon.
I think it was episode 71 where we went to
this great deal of detail, and to the extent
that we'll have the time, maybe discuss some
of the larger macroeconomic issues.
For regular listeners, you know the drill.
If you're new to the program or if you haven't
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There's a link, which will take you to the
Patreon page, and you can subscribe and get
access to the overtime feed, which will be
a continuation of my conversation with Kyle
Bass as well as the transcript and rundown
to this week's episode.
Kyle, stick around.
Okay.
Today's episode of Hidden Forces was recorded
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