Kyle Bass’ call that a China banking crisis is imminent is already getting push-back, with Deutsche Bank calling it unlikely and exaggerated. “We think the article basically referred to a hard-landing scenario, for which our economist only assigns 20 percent probability in 2017-19,” China bank analysts at Deutsche Bank said in a note Thursday.
Bass, who is famed as one of the few major investors to correctly call the U.S. subprime housing collapse that kicked off the 2008 global financial crisis, said he expected a China credit crisis that could see the country’s banks rack up losses 400 percent larger than the around $650 billion equity hit U.S. banks took during the subprime mortgage crisis.
“Chinese banks will lose approximately $3.5 trillion of equity if China’s banking system loses 10 percent of assets,” Bass, the founder of Dallas-based Hayman Capital, wrote in the letter to investors dated Wednesday. “Historically, China has lost far in excess of 10 percent of assets during a non-performing loan cycle.”
But Deutsche Bank said the note overestimated problematic credit and didn’t capture “buffers” against non-performing loans (NPLs), such as previously written off NPLs, excess provisions and the banks’ around $1.1 trillion in pre-provision profits.
Rather than China’s banks potentially needing $3.5 trillion in recapitalization, “our analysis suggests high-risk credit of US$1.6 trillion (11 trillion yuan) with recap needs of $500 billion (3.2 trillion yuan) under a hard-landing scenario,” Deutsche Bank said.
Bass’s view: “China eventually may have to print up to the equivalent of $10 trillion in yuan to recapitalize its banks, causing the Chinese currency to plunge more than 30 percent against the dollar.” China has no restructuring industry, its steel production is maybe double what it needs to be today, and so forth. The banks are only part of the problem.
Bonus fun: Lincoln’s birthday; in our opinion, bad judgment to withdraw this, since it was a real DT opportunity to slam the media; finally, we’re not surprised, since real-world things trump micro-this and trans-that for regular people.