‘Full Banking Collapse’: China Worries Pile Up As Hedge Funder Sounds Alarm – Alibaba Gr Holding (NYSE:BABA), JD.com (NASDAQ:JD)

China’s Economic Concerns: A Full Banking System Collapse?

As the U.S. economy continued to show signs of strength, many investors remained concerned with China’s economic outlook. One hedge funder, Kyle Bass, said China was experiencing a “full banking system collapse” in a recent post on X.

Bass, who is the CIO of Hayman Capital Management, linked to a recent Reuters article that highlighted some of China’s economic concerns. Debt for the second-largest economy in the world has been piling up, with local Chinese government debt reaching more than $12 trillion, or more than 75% of the country’s entire economic output.

This is up from 62% in 2019. A portion of that debt is issued by local government financing vehicles (LGFVs). China’s central bank, The People’s Bank of China (PBOC), ordered lenders to extend terms and reduce interest rates on outstanding loans to make it easier for LGFVs to pay off their loans.

But investors such as Bass are not optimistic about China’s outlook. “With Local Government debts exceeding $13 trillion USD equivalents (90% are in default) and $4 trillion in real estate losses, China only has $2 trillion in bank equity,” Bass’s post reads. “U.S. lost $800 billion in the GFC.”

Chinese stocks such as Alibaba Group Holding Ltd-ADR (BABA) and JD.Com Inc (JD) have underperformed in 2023. Alibaba is down more than 20% year-to-date, while JD is down more than 50%. In contrast, the S&P 500 is up nearly 20% year-to-date.

These concerns about China’s economy are not without merit. The country has been facing challenges in managing its debt and real estate market. Moody’s recently cut China’s debt outlook to negative as the property crash continues to weigh on the economy.

The property market in China has been a major driver of economic growth, but it has also been a source of instability. Over the past few years, property prices have skyrocketed, leading to a surge in debt as individuals and developers took on more loans to finance their purchases.

However, with the government implementing measures to cool down the property market, prices have started to decline, leading to a rise in defaults and financial stress for developers. This has had ripple effects throughout the economy, impacting sectors such as construction, manufacturing, and banking.

The Chinese government has been trying to address these issues by implementing various measures, including encouraging more sustainable economic growth, tightening regulations on the property market, and supporting the financial sector. However, the challenges are complex and will require continued efforts to stabilize the economy.

Investors will be closely watching China’s economic developments, as any further deterioration could have global implications. The interconnectedness of the global economy means that a significant economic downturn in China could impact other countries and markets around the world.

While concerns about China’s economic outlook persist, it is important to note that the country still possesses significant economic strength and resources. Its large consumer market, technological advancements, and global trade dominance are factors that could help support its recovery and future growth.

However, the road ahead will not be without challenges, and it is crucial for investors and policymakers to closely monitor China’s economic developments and take appropriate actions to mitigate risks.