Chinese Banks Have Never Faced a Problem This Big
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Curious what you think about the state of the Chinese economy right now, because this ties into how actively the U.S. needs to weaponize its economy against China. You know, post-COVID, there was never really the rebound they expected. There's an unemployment crisis. They're basically depending on manufacturing and nobody wants to buy their stuff anymore. Do we need to do anything or are we just seeing the house of cards falling apart? Yeah, that's a great question. I mean, again, I don't know.

If I'm in a regulatory position in the United States, I don't allow any country to have an asymmetric advantage against U.S. companies, which is what we've given them by not submitting them to audits. So all I'm saying there is just level the playing field.

And in leveling the playing field, the Chinese Communist Party won't allow their companies to get on it, especially the national champions. And so they got to pull out. Well, that changes their ability to raise money. So going back to their economy, their economy is, I think, fundamentally flawed in its structure. And this gets into maybe a philosophical argument, but their banking system is almost three and a half times their GDP in assets.

Hours is one time, just to be clear. We've been running a detailed, complex financial system for over 100 years. They've been at it for about 20 years. When they entered the WTO in 2002, that's when they began real banking. OK, so they've only been at this for a while. There are two Chinese banks with more assets than J.P. Morgan.

I mean, that's just crazy if you think about it. So if your system is three times more levered than our system, and if 40% of your assets are lent to real estate, and real estate's down between 30 and 50, your whole banking system's insolvent, which is where they are today. So they have an insolvent banking system. They have a real estate crisis. They have a youth unemployment crisis. And the only thing going well for them is just-in-time manufacturing of whatever they manufacture.

And they've spent the way you think about China Inc. is they've spent their current account surplus, which is kind of their country's net income. They've spent it on modernizing their military over the last decade. So that money isn't just sitting in a magical pile somewhere where they can access it. It's been spent. So to your point, their economy is getting crushed and destroyed.

There's a fascinating kind of philosophical argument here that actually applies all the way across the world is when you see the fertility rates of every single nation, every major nation in the world, fertility rates are hooking lower pretty hard, right? In China, the demographers had this nice arc of demographic decline out to 2050, and they've had to redraw the chart because China's

average now fertility rate in women's 1.1. You need 2.1 just to sustain population. So they have a huge problem. I believe that problem, this is my own philosophy, is in real estate when inflation happens and in China, as you know, in tier one cities, real estate prices, median income, median home prices to median income, that ratio got to 26 times.

in tier one cities. In America, at our subprime worst, we were at seven times. So 26 to seven. So to contextualize that as we all sit here, if you make $100,000 a year, can you afford to buy a $2.6 million house?

No, there's no chance. Right. So what happens? The men are not having sex. They're not dating. They're not marrying because they have to stay at home because they can't afford a house. And it's happening in America, too. Right. If you let inflation take off, what happens is naturally a decline in fertility, a decline in birth rates. And if you allow it to go crazily like China did.

it's more pronounced. So when Xi Jinping said financial security is national security, notice that he has not tried to incentivize real estate prices to turn around. He can institute plans that say, oh, we're going to buy this many houses. We're going to do this. We're going to do that. As you know, he can do pretty much anything domestically.

but he knows he needs housing prices to continue to come down to reset his economic base. But in the meantime, that is a significant population decline. It's a significant decline in GDP growth, call it organic GDP growth. And they're really reliant now on their export machine. That's it. And how many times have you heard, oh, we're going to turn towards internal consumption?

Well, the middle class in China that got elevated from poverty had leverage to their apartment and their apartments now down 30 to 50. They've lost all their equity. So the entire middle class is bankrupt again in China.

So to your point, I believe that they're having their own economic, the largest economic crisis they've ever had. They'll never admit it, but what would they do in that environment? Well, they would sever all macro micro level data feeds to the US or to the West. Check, that happened in Q1 of 23. So now the only data you get is from the state and then they make it available in a press release.

I don't know if you guys ever had a wind machine. It was like a Bloomberg machine. It had amazing data from China. The data fidelity wasn't great, but it was much better than what we get now. They turned all of those off. They turned them off to Harvard, to Stanford, to everyone that had wind. We had one. Data's gone. So now you just wait for a press release and whatever they want to tell you is what you're hearing.

One of the things that the CCP did during the 2008 financial crisis is you know They kind of weathered it because they did a massive stimulus, right? But that stimulus was through the CCP telling the banks loan craploads of money to anyone who wants it, right? But now we've gotten to the point where their banks are way over leveraged. They're insolvent as you say so

The CCP really like does that take away their ability to do economic stimulus now? So I think when you think when you think about China, you have to think about China in two spheres their domestic sphere and their sphere of how they interact with the world so Domestically, they have an RMB based economy their bank insolvency is RMB based and

My view is they have about $3 trillion worth of RMB, so call it 21 trillion RMB of equity in their banks has been wiped out. So if they wanted to abandon all, if they wanted to just fix it,

They could print 21 trillion RMB and recapitalize all the banks. Now, would people, particular Chinese people benefit from that? Yes, they would. Maybe the CCP could remove their ability to profit from this somehow. But domestically, they can fix anything. If they abandon all moral hazard, they can fix it. What that does, though, is create huge domestic inflation.

Because if they're going to recap their banks and stimulate domestically, you're going to have massive RMB inflation outside of kind of the rest of the world, if you follow me. So they're in a real precarious position, but they can act to fix it. I don't know if you've seen their central bank entered into a program. So the amount of local government debt in China is right around $14 trillion worth. It's a huge number. The LGFV debt is

And there's a program right now with the central bank to refinance one point six trillion dollars worth. OK, I'm talking in dollars of that debt. And so banks that have non. So many of these LGFV loans are not paying. So these municipalities are all out of money.

And so the government is helping them replace those loans and kind of basically paying off the banks and resetting the loan and resetting a new loan. And they're just growing those loan balances. You know, we have this saying in our firm, a rolling loan gathers no loss. So if they can keep rolling the loan and just amping up the principal balance, but the central bank

pays the loan off and resets the banks. It gives the bank a little bit of breathing room. So that's $1.6 trillion. To put that in it, you probably haven't seen that number. You probably haven't read a story about it, but I can show you a press release. The US banking system going into the financial crisis had $1 trillion of equity. We lost about $800 billion and we recapped it. We basically recapped all the equity in our banking system. China has a program going right now

for twice what we lost in 2008 in our banks. And no one writes anything about it. And it's having almost no effect. So the problem is enormous. We think that 70% of those LGF fee loans are in default. So 70% of $14 trillion is in default.

Well, they're only recapping, you said 1.6 trillion out of 14 trillion. So that's like 10, 12% or something. So that's also not very much of what needs to be recapped. But I mean, in RMB terms, we're talking about like...

I mean, uh, 11 trillion RMB. I mean, that, that actually moves needles over there. The point point is, is they're trying to see how efficacious it will be because they'll, they might make that program bigger if it works. But in the end, the way I look at it is mentally they're, they're central bankers and their bankers have like 30 plates spinning and the plates are starting to drop. And, um,

they're not going to be able to fix it all because they might be technocratically smart. They've never had a crisis of this magnitude with this much leverage.

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