Thursday, February 11, 2016

What Is Going To Happen When Chinese Markets Re-open This Weekend?

So I'm blowing the dust off the contingency plans, magnitude 9 Los Angeles earthquake, poison gas attack on a European capital, reality TV guy becomes U.S. President, and find we don't have one for 'world markets crack as Chinese celebrate New Year'.
Not good.

The Shanghai and Shenzhen markets showed small upticks (~1%) before putting on their party clothes but when Hong Kong reopened  earlier today it promptly dropped 4% and now I'm reading about how bad the Chinese banks could actually be. From Bloomberg:

Bass Says China Bank Losses May Top 400% of Subprime Crisis
  • Manager says 10% asset loss would cut equity by $3.5 trillion
  • China would have to print $10 trillion to recapitalize banks
Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis, said China’s banking system may see losses of more than four times those suffered by U.S. banks during the last crisis. 
Should the Chinese banking system lose 10 percent of its assets because of nonperforming loans, the nation’s banks will see about $3.5 trillion in equity vanish, Bass, the founder of Dallas-based Hayman Capital Management, wrote in a letter to investors obtained by Bloomberg. The world’s second-biggest economy may end up having to print more than $10 trillion of yuan to recapitalize banks, pressuring the currency to devalue in excess of 30 percent against the dollar, according to Bass. 
Bass, 46, scored big after betting against mortgages in 2007, racking up gains as the world’s largest banks wrote off more than $80 billion in subprime losses. All his calls haven’t been as prescient. He revealed wagering on a collapse in Japan’s government-bond market in 2010, a short position that Bass later acknowledged that other bond investors had nicknamed “the widow maker.” 
Largest Resetting
“What we are witnessing is the resetting of the largest macro imbalance the world has ever seen,” he wrote in the letter. “Credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world.”...MORE
Psychologists tell us it's good to have something to look forward to.