On this week’s “Big Ideas with Ben Weingarten podcast,” Federalist Senior Contributor Ben Weingarten interviewed prominent hedge fund manager and outspoken China hawk Kyle Bass. Listen to their discussion on how the U.S. can win the economic and ideological competition with Communist China, what a U.S. grand strategy with respect to China should look like, and much more.
Here is the full transcript, edited for clarity.
Ben Weingarten: What’s your long-term view as to the strength and the growth rate of China’s economy versus that of America?
Kyle Bass: I think that first of all under the context of the basic architecture of the Chinese economy, it’s important to note that they are somewhat of a paper tiger. And I’m not saying that the whole thing is a Potemkin Village. What I’m saying is we as a civilization in the West tend to give China buy-in to the narrative that they are now the second largest economy in the world. And the basic fundamental underpinning of that particular understanding is rooted in the fact that we simply convert their RMB-based economic aspirations into dollars at a current exchange rate that the Chinese manipulate higher…try to support every single night, in the FX [foreign exchange] market. So when we’re told that their economy is a 13 trillion dollar-based economy, it’s not because less than nine-tenths of 1% of all cross-border currency transactions, settle in Chinese currency. They purport to be 15% of global GDP and yet less than nine-tenths of 1% settle in their own currency. Now, how can that be? You can’t be a real global economic power if you have a closed capital account and a contrived FX system.
And so…for some reason, we’ve all bought into this narrative that the Chinese economic might is potentially the greatest in the world; [that] this concept of Marxist-Leninist socialism is a strategic true competitor to Western democracy. And there are people in the U.S. that believe maybe it’s a better system than ours, when it is literally a narrative that they have projected through all the various infiltrations of academic institutions, think tanks. All of the chief economists of all the U.S.-Asian JVs [joint ventures] are members of the Communist Party, that’s a strategic definition of who these people are. They actually control the Western narrative. And therefore, it’s really important to take a step back and say, “Wait a minute, we’re giving them credit, we’re giving them the full benefit of the doubt that they could actually convert their RMB-based economy into dollars when they can’t.” Nobody takes their monopoly money, and no one will. No one trusts the Chinese government and this…the Wuhan virus has given people even less reason to trust the Chinese government.
Ben Weingarten: Yeah, I’m struck on the Wuhan virus point with the fact that world authorities…originally judged the data coming out of China to be credible. And of course, anyone who has looked at the Chinese economic numbers over the decades recognized that the books are totally cooked. So how do we even judge the strength of China’s economy today versus that of America given, as you mentioned, that there is sort of a Potemkin element of the ghost cities that they have, and the fact that our data is so poor and the data is filtered through the Chinese Communist Party in the first place?
Kyle Bass: Again, I don’t think you can grant them the benefits of the…just exact exchange rate of RMB to the dollar, when they have a closed capital account. How do we get to that leap of faith? The only way we get there then is…is if it’s like ipse dixit, “if they say it, it must be true.” And if enough economists say it, then it is true. And as you know, many Western economists have been corrupted by the Chinese Communist Party and they receive payments from them. And whether there’s a JV between Goldman Sachs and big Chinese investment banks, or Morgan Stanley, or BofA, all of those JVs, the senior economist, the chief Asian economist, must be a member of the Chinese Communist Party. It’s part of the deal. So anything that they write, and distribute to global investors is through the lens of the Chinese.
And so it’s important to note that we need to be objective in our thinking. And once we understand that, China prior to the Wuhan virus was running a fiscal deficit collectively of almost 14% of GDP and their current account surplus has turned into a deficit.
And so China from an economic perspective is desperately short on natural resources. They’re desperately short food, they’re desperately short energy, they’re desperately short base metals, base materials. They have to buy all of those things from the world, and they have to buy it in dollars, Euros, yen, or pounds. They have to buy it in a currency that people will accept that have open capital accounts and [is] freely tradable. And that is China’s Achilles’ heel. And as soon as US administrations, understand that, we realize that we actually hold all the cards. We are much stronger than they are.
Ben Weingarten: How serious in your view, are China’s efforts to create a competing world reserve currency? Do you believe that they actually pose a credible threat in the way of fiat money?
Kyle Bass: I don’t because what do you have to have to have a fiat money that’s trusted around the globe? Well, in the past, what you’ve had to have is a hegemonic position. You’ve had to have a very strong economy, you’ve had to have an open capital account in theory, you’ve had to have won a couple of big world wars, you’ve had to be…have a hegemonic position, and you’ve also had to be a responsible actor globally. They have none of those things.
And they have tried, if you’ve noticed, they’ve gone around through the Middle East because one of the things they are desperately short is energy. And they’ve tried to coerce and cajole MbS [Mohammed Bin Salman] in Saudi Arabia, and MbZ [Mohammed bin Zayed Al Nahyan] in the UAE and they’ve tried to develop an oil exchange that trades in RMB. And I’ve had the benefit of meeting with some of these people, and some of their chiefs of staffs and higher-ups, and they say to me, they start smiling and they say, “We don’t trust the Chinese government, as far as we can throw them. There is no chance we’re going to an RMB-based system. No chance.”
And so, they’ve tried and failed. Then there was “the Chinese Central Bank is gonna create its own digital currency,” and that could be a real harbinger of things to come and could really derail the dollar’s global hegemonic position. And I say, well, they have toilet paper, and they have digital toilet paper. Again, no one’s gonna take these things if they’re not legal tender. If you can’t buy things with them and transact, then no one’s going to accept it. And so I don’t believe that they have a credible threat.
I think that it needs to be monitored, and things that they’re doing need to be taken seriously, but today, until they open their capital account, and become a real responsible global actor, they’re just going to try to lie, cheat, and steal their way through the world, which is what they do today. And everybody is starting to understand this and see it.
And this is like, as you know Deng Xiaoping set up the system of trying to, and told the future leaders to bide their time and keep their heads low, and hide their ambitions and their abilities. And what you’ve seen lately is Xi is playing his hand entirely too loudly, and he’s playing it improperly. And you even see the manipulation in [Chinese] Ambassador to the [U.S.] Cui’s most recent op-ed in The New York Times where in the second paragraph, he talks about how Huawei is giving out masks to New York and Washington D.C. hospitals. It’s their soft power and their ability to coerce and manipulate situations.
Clearly, we all know they’re manipulating the situation. They manipulated it on the way in and they’re manipulating it in the midst of the world’s biggest crisis in the last several decades. And so, I don’t see it being credible.
Ben Weingarten: Yeah, and I’m glad you raise the point about that op-ed. One of the…I think, a positive aspect of their acting so aggressively aside from the kind of soft power initiative, to your point, is that that aggression reveals their weakness.
Kyle Bass: That’s right.
Ben Weingarten: The other aspect, unfortunately, with respect to the Ambassador’s article…he was joined by I think 100 so-called scholars, all Chinese Communist Party apparatchiks, or mostly Chinese Communist Party apparatchiks, calling for cooperation with the U.S., and then about 100 members of the U.S. national security and foreign policy establishment who have sort of built this U.S.-China relationship prior to the Trump administration, also signed a letter calling for cooperation between the two sides. And of course, we see this in financial services, your industry as well. What would be the best case that you would make to your colleagues in the financial services industry for why they should decouple from China, given that their economic self-interest relies on maintaining the status quo?
Kyle Bass: Yeah, this is the hard part, right? What China does so well? Again, they lie, they cheat, they steal, they bribe, they do everything they can do to further their own interests as a nation-state in our world, and they use our weaknesses against us. And one of our weaknesses is a desperate need to pad our own pockets. If you think about what they do, they dangle that carrot, they dangle the carrot of the path to riches and the path to wealth through China and China’s 1.4 billion people and selling things to all of them. And then what they do is they’re brilliant in granting special market access to few. They invest $5 or $6 billion in Ray Dalio’s Bridgewater, and they invite him into the PBOC [People’s Bank of China] meetings, he becomes evangelical about the greatness of China because he’s making billions of dollars off the Chinese. And then you have Steve Schwarzman and they grant him special access in the 1.4 billion potential of financial services and asset raising in China, and he becomes the chief Chinese spokesperson for President Trump. And again, becomes evangelical from the financial side.
I can go person by person, and tell you, Sheldon Adelson and Steve Wynn were granted casino licenses there. They do the bidding of Xi Jinping with President Trump. None of them are tasked with safeguarding the national security of our country. They’re tasked with trying to make as much money as humanly possible for their shareholders and for themselves, and as far as U.S. national security is concerned, they don’t care.
And so I think this is…what’s required here is for someone in the National Security Council to realize that there’s a schism, and the schism is primarily between the presidential cabinet, the National Security Complex, an edifice of the United States and that of Wall Street.
And if you think about it, China’s neutered the Woke, let’s just say the Woke people in Hollywood because Hollywood…when was the last time you saw a Hollywood film where the villain was a Chinese…government actor or a spy? They won’t make those movies because they can’t sell them in Southeast Asia or in China. And as you know, the Chinese Government through its SOEs [state-owned enterprises] and its others methods of madness, have bought into many of the Hollywood production companies, and they actually control the content.
So you don’t have Hollywood speaking out against the Human Rights, the vicious Human Rights abuses that the Chinese are currently undertaking in Xinjiang, and with the Falun Gong, and with the Tibetans, and the Christians, and everyone they’re persecuting for their religious or political affiliations. So you don’t have Hollywood coming after them, you don’t have Wall Street turning a blind eye or holding them accountable for their crimes against humanity, because Wall Street can’t wait to get their paycheck at the end of the year and start all over again.
So I think there’s this schism that exists that must be brought to light by people like you, by people like me, by people like anyone willing to talk about the facts, right? The Victims of Communism Foundation, which is set up by the U.S. Congress and housed in the Senate building. They do a decent job of raising the alarm. Can you imagine that after the Holocaust, and we all swore “never again,” that this would ever, ever happen again? That people would be persecuted for their religious beliefs, and killed, and organ-harvested, and mass-murdered? And here, it’s happening in Xinjiang.
We know our National Security complex knows that it’s at least between a million and three million people are being held against their will, and they’re running live organ harvesting buffets for anyone in the Chinese Communist Party. They’re talking about as part of this Wuhan virus, you can get a double-lung transplant at any time that you want. Well, how’s that even possible? Unless you’re just gonna go in and kill someone the day you need a double-lung transplant.
Ben Weingarten: We underwrite some of the horrors of this regime by way of a mutual funds and other index funds that have weightings that are increasingly geared towards mainland Chinese companies, including some like Hikvision for example, that produce the surveillance equipment, for example, in the Xinjiang camps. How vulnerable are we because our capital markets are open to Communist China? And what reforms would you suggest in the way of capital markets to weaken their efforts to exploit them?
Kyle Bass: Yeah, You’re striking a chord with me because I’ve spent a lot of time on this and I’ve gone up to meet with both sides of the aisle, and both chambers of our Congress and Senate, and it is absolutely incredible to me to see the machine the Chinese has built behind the scenes, that funnels hundreds of billions of dollars into their war machine, into their cyber machine, into their surveillance machine, that we, as you mentioned, are all funding through our passive investments in our retirement accounts, and through endowments, and through foundations, and pension funds.
It’s so easy to fix this, Ben. Today Chinese companies don’t have to adhere to the same regulatory standards as U.S. companies. They don’t have to submit themselves to PCAOB [Public Company Accounting Oversight Board] covered audits, like every U.S.-listed company does. We just gave them a pass. We gave them an explicit pass in 2013 and said, “You just send us a 20-page glossy of some pictures and a little bit of writing for your annual reports, and we’re not going to force you to file detailed financial statements and submit yourselves to audit.”
It’s absolutely incredible to me that the Chinese companies don’t adhere to the same standard as US standards. It wouldn’t be xenophobic, if the Chair of the SEC [U.S. Securities and Exchange Commission] said, “Anyone that lists their securities in the United States is going to have to live up to U.S. Securities listing standards.” Does that sound crazy? No, it doesn’t. It doesn’t, but we haven’t done it. And it might not help that the Chair of the SEC was Alibaba’s lawyer in taking them public.
Again, they have their hands in every single cookie jar in the United States and abroad, and in supranational organizations. If you made me the “Securities Czar” in the U.S., I could fix this in a matter of weeks. This would be easy.
Ben Weingarten: On the matter of trade, and I’m skeptical that the Chinese Communist Party would abide by any deal they signed. All that said, if you were the “Czar of Trade,” what would you be recommending to the Trump administration…
Kyle Bass: It would be so easy. I would just talk about reciprocity. I would say, we’ll allow the Chinese to invest in sectors that the Chinese allow us to invest in, we will be reciprocal and fair in every way that the Chinese are willing to be reciprocal and fair. There’s this saying that, “In a free trade world, China wins. In a fair trade world, the United States wins.”
And it’s important to note that when you’re driving into the U.S. Commerce Department building and you’re going through a series of arches as you go into the interior courtyard, there’s an etched quote on the exterior of the commerce building, and it says, “Trade between nations must be fair, and equitable.” And Benjamin Franklin said that. And it doesn’t say, “Trade between nations must be unrestricted and free, and benefits inure to the lowest bidder.” That is not what was said. And the Chinese take advantage of our system in every possible way. So if you made me the “Trade Czar,” I would start with reciprocal agreements.
Ben Weingarten: I talked about the notion of decoupling in the financial services sector, and this is obviously a broad and general question, but do you think, more broadly, America should look to decouple from China? And what would that look like besides the heads of everyone on Wall Street exploding at the prospect of that concept?
Kyle Bass: Yeah, people say to me, Wall Street economists will say to me, when we talk about decoupling, they will say, “Well, Kyle, that could easily cost the U.S. economy, 2 to 2.5% of GDP. That would be incredibly disruptive.” I say, “Well, they steal 2% of GDP every year in U.S. intellectual property, and they earn a return on that from every year thereon.” I said, “If we did this, it would be a net NPV [net present value] positive for U.S. companies.” They look at me, like, “Yeah, I guess that’s a good point,” or, “it doesn’t sound so hyperbolic.” People tend to think that that statement in itself is hyperbolic, but no one’s unpacked it. No one’s thought about this.
…Look at what Shinzo Abe and the Japanese are doing now. They are saying that they will pay the relocation and rebuilding costs of any Japanese company that wants to relocate its supply chain back into Japan from China. And, as you know, even [Director of the U.S. National Economic Council Larry] Kudlow has said that we think that’s a good idea, and we may do that here too.
Again, if I were the “Trade Czar,” I would offer that up to our companies. I would offer them long-term tax holidays, and I would offer to pay moving expenses to relocate supply chains out of a country that is run by a tyrannical Communist Party.
Just think about–this is actually bigger than a simple power competition. This is a simple cultural differential between an ideological competition…The role of socialism in the party strategy…ought to make clear that our strategic rivalry with China is simply ideological. It’s not a contest for power. It is two separate, distinct, mutually exclusive ideologies clashing head to head, and I think it’s an intractable problem.
Ben Weingarten: Will the Belt and Road Initiative (BRI) ultimately bankrupt China, or is it actually gonna cut the other way where it will bankrupt those with whom China has transacted, where they’ve built infrastructure, and essentially are engaging in a loan-to-own strategy.
Kyle Bass: Yeah, I guess I’ll ask you a question back on that one. Is gunboat diplomacy alive? Meaning, if all of the BRI borrowers default on the loan-to-own strategies of the Chinese, how are the Chinese going to colonize and/or collect on their collateral? Whether it’s the railroad in Uganda, or the port in Indonesia, or the canal in Nicaragua, how are they gonna take it unless they’re willing to get gunboats out there and take things, forcibly?
It’s actually a great question. I don’t know the answer. I don’t think that the Chinese efforts to colonize, as The Economist so adeptly put it this weekend, to colonize North Africa with the Belt and Road loans, I’m not so sure that default on those loans means defaults in international terms and other agreements. Even though the Chinese Communist Party has really infiltrated the World Bank and ICSID [International Centre for Settlement of Investment Disputes], which is the basic or the fundamental basis by which a lot of these loans are made, I don’t think, I just don’t think the Chinese are gonna be able to collect.
Ben Weingarten: Relatedly, what would it mean for the world if Huawei was the dominant player in 5G, and built the 5G infrastructure throughout most of, if not all of the West, save for maybe the U.S.?
Kyle Bass: Yeah, look, we all know the real issue with 5G is not that it’s just a little bit faster, or it’s the next-gen telecom network. The fact that 5G speeds are 10-to-100 times faster than 4G speed, enables supercomputing at mobile speeds, which means that data streams that are put onto 5G networks can be owned by the network provider because they can decrypt. If you can supercompute at speed, you can actually own that data. So, this is China’s… huge long-term plan to own the data streams of the world. We, as a country, realized that. We are never going to let that happen here. Huawei and ZTE, those are the cancers of the global telecom networks. I’m embarrassed that the UK has agreed to let some Huawei into their system, but I can tell you, won’t happen here. We’re trying to develop a better national strategy for 5G, but at least we realize that our national security depends upon throwing out Huawei and ZTE.
Ben Weingarten: By the time this book that I’m working on comes out, hopefully we’ll be long past the throes of this pandemic, but I suspect we’ll still be grappling with any number of issues relating to it, including the idea of accountability from the Chinese Communist Party. And probably the most extreme version of accountability absent actual reparations would be something like debt cancellation of U.S. debt held by the Chinese Communist Party, which of course is viewed as a very radical option. What would be your recommendation for what a reparations package should look like, and should we consider something as drastic as that, or would it cause a cataclysm in financial markets, with spiking interest rates and all of these knock-on effects that we could probably speculate about?
Kyle Bass: …So let me start by offering you just an idea, if you think about how Western democracies can compete against…how we can compete against an intolerant opponent with tolerance, and that’s really how we’re trying to wage this war as we speak today. And I think we are never going to be able to outlie, outsteal, or outcheat the Chinese Communist Party, or outbribe them, because it’s illegal. We won’t stoop to their levels. So what we need to do is think about playing to our strengths.
And our strength and the strength of Western democracy is rooted in the rule of law, and in granting individual freedoms and protecting those freedoms of the people. And so you’ve probably seen in the last few weeks, there have been a few attempts at setting forth an architecture…that is a legal architecture that sets forth this idea, that what we should simply be doing is enforcing our laws on the bad actors in China, both SOEs and “private companies”. We should start suing them and they should be held accountable for their actions.
And so you’ve seen think tanks in the UK set forth these architectures. You’ve seen Harvard professors talk about the fact that they have broken at least 10 international laws with their lies about human-to-human transmission, the cover up that they engaged in, the hoovering up of PPE before they ever got the World Health Organization to admit that it was a pandemic. And the fact that they lied to the rest of the world, and could have made this awful and sinister virus, and this misery that the Chinese Communist Party has brought to the rest of the world, they could have contained this. We could have maybe saved 90% of these effects from the rest of the world if they’d have just been honest with the world. So whether you’re the Henry Jackson Society in the UK, or whether you’re Harvard law professors, there is this concept starting to be floated around, that there is legal liability and there’s financial liability. And if we can start breaching the sovereign veil and grabbing SOE assets, I can tell you that will change forever the relationship between China and the West.
China uses the legal systems of the West to adjudicate wrongs that they think have been perpetrated against them. But they don’t pay for the system, we do. When the Chinese invest in the United States and they make huge capital gains in either venture capital or equity investments, you realize they pay zero tax. It’s insane that we’ve let them run roughshod over us for so long. There are simple tweaks that we can make to make this strategic rivalry and competition at least a fair fight. Right now, it’s an unfair fight.
Ben Weingarten: …I’ll ask two more questions…one narrow and one broad. The narrow question is, what is the single biggest ignored weakness that the U.S. government and even U.S. civil society can exploit when it comes to China, and particularly the Chinese Communist Party, whether in the economy or elsewhere?
Kyle Bass: Yeah, I mean that’s the first thing I talked about. China’s Achilles’ heel is the fact that they have a closed capital account and rely on our dollars to be the blood that grows their tumor, the Chinese Communist Party. And if we can attenuate or stop some of the dollar flows into China, we hold all of the cards for their long-term growth in their economy. We as a Western society hold all of those cards. As soon as we realize that, and we also realize exactly how they have manipulated the dollars from here to there, again in that blood flow to grow their tumor, we can stop that. And it’s actually fairly easy to do. Again, if we just simply level the playing field, and force their companies to submit to audits, imagine how much fraud is in companies in China that don’t have to adhere to auditing standards. Look at the couple of examples we’ve seen in the last few months of tens of billions of dollars of fraud, and again, not even caught by auditors.
Ben Weingarten: Lastly, if the National Security Council brought you in to consult with them on crafting a grand strategy for the U.S., what would be the three points that you would wish to impart?
Kyle Bass: Number one is, understanding the financial basis for all of their claims. When you think about their militaristic and assertiveness, and their assertiveness globally in the last 10 years, it’s all rooted in the fact that they’ve become an economic power. So I believe their military assertiveness is enabled by the globe’s belief in their economic superiority, or rise in the world. Again, if we go back to this point that they have a closed capital account, as soon as our Security Council realizes where their Achilles’ heel is, we’ll be in a much better place. And the good news is, is they’re starting to really understand this. That’s the first thing.
The second thing is, we need to set forth national security benchmarks for things that we just won’t allow to happen. One of the disinfecting lights that’s been shined upon some of the really nefarious practices of the Chinese Communist Party has been basically their lift of our pharmaceutical business out of America and into China. The fact that 90% of active pharmaceutical ingredients for U.S. antibiotics are made in China, is like allowing the Chinese military to make our bullets and missiles for our military. It’s crazy that we would think about outsourcing our ammunition for our National Security Complex, and that’s essentially what we did with our drug business. As you saw in the last 30 days, China has threatened to withhold medical supplies from the United States in an effort to try to get Trump to stop calling it “The Wuhan virus.” They literally threatened to withhold antibiotics and blood pressure medicine from the U.S. Think about this: 100% of U.S blood pressure medicine is manufactured in China. There are 700,000 Americans that take blood pressure medicine every day. We have a two-week supply. Just think about the power that we’ve put in their hands. We have blown the curve. We’ve blown the turn on several national security implementations. We have successfully kept China from buying, or acquiring, or trying to steal as much of our wafer and ship technology as we have by using CFIUS [Committee on Foreign Investment in the United States regulation] and specific CFIUS reviews to deny Chinese and even Chinese proxies in Singapore from buying U.S wafer fabs, and moving semi-conductor manufacturing to China.
So, there are a few things we’ve done in national security complex that are proper and a few that we’ve missed. Right? And we need to restructure those. So, I think understanding their position in the global economy is hyper important. I think setting forth a national security strategy that’s ironclad, and requiring absolute necessities of our country to be manufactured here and stockpiled here…we can legislate that.
And the third thing is, again, developing a very long-term plan to compete…collectively with our allies and partners, to compete against this Marxist-Leninist socialist state of China. Because we need to be thinking about this in 10-, 20- and 30-year increments, and not just padding our pockets once a year. And we need to start adding that responsibility and embarrassing those on Wall Street that don’t seem to care about the exploitation and the denial of human rights; the exploitation of American companies just to pad their own pockets and wallets.