China has the second largest economy in the world. For years, the Chinese economy was number one, but the United States took that position away from China years ago, and the Chinese want it back. But the main force behind the Chinese economy was their manufacturing capabilities, but commodity prices and labor issues along with more competition from other Asian countries forced the Chinese to move to a consumer-based economy five years ago. But moving to a consumer-based economy is expensive, and investors like Kyle Bass and George Soros have been watching the Chinese spend billions of dollars in capital reserves to keep their stock market solvent and their banks stocked with fresh money.
Kyle Bass, the celebrity investor that called the demise of the sub-prime mortgage scheme in 2008, thinks the Chinese banks have overextended themselves to a point of no return, according to Bloomberg.com. The government forced the banks to lend money to corporations and people with consumer-related ideas, and now many of those borrowers can’t pay the loans back. Bass believes that China will be forced to use their massive capital reserves to bailout the banks and remove the bad debt. When that happens, Bass and other investors think the yuan will have to be devalued, and that means the Bass hedge fund, Hayman Capital, will make another fortune.
Hayman Capital Management and Kyle Bass have been under fire lately for several questionable investments. Bass is participating in a scheme to short drug stocks before the news breaks that they are being investigated for price fixing. That investment has some unethical strings attached to it. When Bass supported the former president of Argentina, Cristina Fernández de Kirchner when she defaulted on the country’s bonds, he was raked over the coals for his shortsightedness. And when Bass took General Motors side against the victims when the news broke that several models had steering and airbag issues, the ethical heat became more intense.