China is facing the US financial crisis ‘on steroids’ as the real estate market collapses, famed hedge fund boss says

China is facing the US financial crisis ‘on steroids’ as the real estate market collapses, famed hedge fund boss says

Kyle Bass says China’s problems are bigger than anyone realizes.Reuters/ Rick Wilking

  • China’s property debt is a worse version of the US’ 2008 financial crash, Kyle Bass told CNBC.

  • The country’s real estate sector was too debt-reliant, and now every public developer is in default.

  • Just two companies hold a debt of $500 billion. In total, the US banking system lost $800 billion in 2008.

China’s overreliance on real estate has sent its economy tumbling toward 2008-era financial conditions, Kyle Bass told CNBC on Tuesday.

“This is just like the US financial crisis on steroids,” the Hayman Capital founder said. “They have three and a half times more banking leverage than we did going into the crisis. And they’ve only been at this banking thing for a couple of decades.”

The years of double-digit growth China enjoyed prior to the pandemic were made possible by an unregulated real estate market, Bass noted, which leaned too heavily on debt to expand.

With defaults now plaguing the industry, this spells massive trouble for the country’s broader economy. The real estate sector makes up around a quarter of the country’s GDP and 70% of household wealth.

“The basic architecture of the Chinese economy is broken,” Bass summarized.

In fact, virtually every public or listed Chinese developer is currently in default, he said. Two of the biggest, Evergrande and Country Garden, have a collective debt of $500 billion. The former was recently ordered to liquidate by a Hong Kong court, and its collapse is sparking fears of systemic risks to come.

By comparison, the US banking system lost around $800 billion in the great financial crisis, later re-equitized through fresh capital, Bass outlined. However, Chinese officials have hesitated to provide massive stimulus.

Defaults are leading to financial strain amid local governments, which raise revenue through land sales to developers. Government bankruptcies are now trailing the property market, with the local government debt marketplace equivalent to $13 trillion, Bass said.

This stress has been clearly reflected in Chinese markets, which have suffered a $7 trillion fallout since 2021. In recent weeks, Beijing authorities have publicized efforts to stem these outflows, though confidence has yet to pick up.

“China is going to get much worse no matter how much their regulators say we’re going to protect individuals from illicit short selling,” Bass said. “Imagine regulators blaming a 15-year swoon on their stock market on short sellers.”

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