Kyle Bass, founder of Hayman Capital Management, a hedge fund in Dallas, Texas, expects the Chinese banking system to strain and struggle with their bad loans. The current facts display challenges for China’s 134 city commercial banks. After a forced cleanup of credit unions, in the 1990’s, city commercial banks, scattered from Harbin to Hainan, were created to handle the small lender responsibilities in China. These banks, in recent years have multiplied their risk by dumping money into opaque investment products. One current result is the 90% downturn of profits in 2015 at one lender, China Resources Bank of Zhuhai and Co.
The challenges on the immediate horizon for the Chinese banking industry can not be disputed, however Kyle Bass’s predictions raise a question about his possible involvement. His morally checkered path consists of questionable financial movements. His current scheme is dealing with pharmaceutical companies. First, he “short-sells” their stock and then challenges one or more of the pharmaceutical company’s patents, through his front organization, The Coalition of Affordable drugs. This causes fear in the markets.
The planned and inevitable results are, stock prices go down, Bass makes millions, the pharmaceutical company’s stock goes back up, and their desire to continue to fund research on their drugs goes down. In the end, the people that suffer the most are the patients that need that particular drug to ease their pain, minimize their need for chemotherapy, or to save their life.
According to the article Kyle Bass The Frantic Investments of a Desperate Gambler, Bass is repeating this process with one pharmaceutical company after another. Each time his bank account grows. Considering his past motives for action in his business dealings, it is important to research deeper into China’s current situation, before believing his predictions.
The city banks in China hold 15% of the nation’s commercial assets. They used financial engineering to disguise lending, by buying investments from other investment firms. If these investments go into default, liquidity problems can arise for the small bank. This can cause failure for that particular banking institution and the results can have a domino effect economically in that community.
Kyle Bass’s prediction on China’s small banking situation may have some accuracy, however, considering his history someone may question, “what is in it for him?”