Bass said the economic fallout in China could be even more severe, laying bare what he sees as a desperate shortage of U.S. dollars in the Chinese economy at a time when the Chinese Communist Party is beating back a political crisis in Hong Kong, a key conduit of foreign capital.
Bass argued that the Chinese economy has evolved in several fundamental ways over the past decade as wages for its workers have risen, making Chinese exporters less competitive relative to rivals in countries like Vietnam and Mexico. Meanwhile fears about the health of the Chinese economy, which has required ever higher debt loads to fuel ever lower levels of economic growth, have led wealthy Chinese citizens to try to move money abroad to jurisdictions that protect against government expropriation.
This behavior peaked in 2016, when a worrying decline in China’s foreign-exchange reserves led the government to impose strict controls on moving funds out of the economy. At the same time, Chinese companies have taken on increasing levels of dollar-denominated debt to enable their purchases of foreign commodities like oil and agricultural products.
“They are starting to look like a traditional emerging market, with a closed capital account and huge dollar-based borrowing,” Bass said. China’s four largest banks “in the last two years switched from huge dollar-based asset surpluses to now they have dollar-based deficits across the board.”
While the coronavirus epidemic will cause untold damage to the global economy, Bass hopes that it will help focus Americans’ minds on the unsustainability of the U.S.-China economic relationship, as American efforts to combat the disease have been hampered by an overreliance on Chinese and other foreign sources for key medical equipment and pharmaceuticals.
He said U.S. government should aid companies in efforts to bring critical supply chains back within U.S. borders and should continue to discourage American investment in Chinese firms, as the Trump Administration recently did when it restricted a federal pension fund from investing in Chinese securities.
Bass said the U.S. should go further and bar Chinese companies from raising money from the U.S., unless it submits to U.S. securities laws, including thorough audits that Chinese firms have avoided since U.S. and Chinese regulators signed a memorandum of understanding in 2013 exempting Chinese firms from those procedures.
The U.S. and other Western democracies may be forced to confront China more forcefully as a political crisis in Hong Kong continues to brew. ...
Consider also the military ships in the South China Sea playing chicken and US rhetoric over China being responsible for Covid19 fallout globally and it really seems like we are ramping up the risk for a nasty war.