In his first investor letter in three years, Kyle Bass, Wall Street's most visible China bear, explains the rationale behind his latest massive macro bet: A carefully-constructed position that will produce carry for his investors while also producing a massively asymmetrical outcome should the looming crisis Bass describes come to pass, in either China or Hong Kong. The letter was previewed earlier in the Wall Street Journal. Bass also appeared on CNBC earlier today to answer some questions about his views on China and Hong Kong, alongside former White House Chief Strategist Steve Bannon.
Via Kyle Bass, managing partner of Hayman Capital Management
For the better part of the last 36 years, since Hong Kong pegged its currency to the USD and ceded monetary policy to the Fed, Hong Kong has been a financial and political oasis for investment into mainland China and Southeast Asia. Today, newly emergent economic and political risks threaten Hong Kong’s decades of stability. These risks are so large that they merit immediate attention on both fronts. In this letter, we will discuss the origins of Hong Kong’s impending crisis, a brief history of Hong Kong, the economics of currency boards/pegs, the agreement that governs the United States economic and political relationship with Hong Kong, and how Xi Jinping’s China is forcing the Hong Kong Government to violate the agreement that requires Hong Kong to maintain its autonomy or lose most-favored-nation trading status and be treated as China itself is treated.
The Economics of Hong Kong Have Changed Dramatically Since the Global Financial Crisis
Hong Kong was once vitally important to China’s economic position. At its apex in 1993, Hong Kong’s economy represented more than 25% of China’s GDP and was the most active port in the world.