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[RUSH TRANSCRIPT BELOW] In this episode, I’m sitting down again with Kyle Bass, founder and chief investment officer of Hayman Capital Management and founding member of the Committee on the Present Danger: China, to get an update on how China’s economy is faring since our last interview five months ago.

“There’s nothing that’s going to bail China out of their economic spiral. They’re having a real estate crisis, a banking crisis, a youth unemployment crisis, and now they need to be worried about their current account,” Bass says.

How have the Trump administration’s policies and recent events affected China and its economy?

And how do the U.S. strikes on Iran’s nuclear sites impact the Chinese regime’s ambitions in Taiwan? How likely is a kinetic war?

Views expressed in this video are opinions of the host and the guest, and do not necessarily reflect the views of NTD.

RUSH TRANSCRIPT
Jan Jekielek:

Kyle Bass, so good to have you back on American Thought Leaders.

Glad to be here, Jan.

Kyle, it’s kind of a historic day. The beginnings of some kind of ceasefire between Iran and Israel. It seems it’s already broken, but maybe not entirely. I get the sense that things are being worked out. What brought this about immediately, in the most immediate sense, were these bombings of the Iranian nuclear sites. It seemed like you had a lot of certainty when I was following your feed about the fact that this was actually going to happen over the weekend. So maybe if you could explain to me why you understood that this was actually happening, because there was an unbelievable amount of speculation, if I recall.

Yes, I think, Jan, when you saw it, it was noted that we moved 30 refueling tankers into the region. We have two carrier strike groups there, and we were supposed to have zero. And we’ve been talking about taking this shot at sending their nuclear program back at least a decade, if not longer. And, you know, when we developed these GBU-57 bombs, we actually, under President Obama, built these bombs for this mission. That bomb was built for that mission.

And so we knew at some point in time that we were going to have to take this shot because we can’t, the world can’t afford for a madman like Khamenei and his mullahs to have a nuclear weapon. They’ve told you what they’re going to do with it. And so, you know, it took real leadership, but it also took the ingenuity and the grit of the Israelis to remove all of Iran’s air defenses.

So think about this. Syrian airspace is open. Iranian anti-aircraft facilities have been taken down. And so this was our red carpet golden ticket to go take that shot. And the IAEA [International Atomic Energy Agency] had just said that for the first time in 22 years, Iran had enriched far, far past the agreed-upon four or 5%. And they were at a highly enriched uranium status, which of course means we believe they could field 14 or 15 bombs. We got to a point where we had to go.

And President Trump did it right. He said, look, if you surrender and allow full inspections of your facilities and us to come in and take over your facilities, then we won’t blow them up. But, you know, you saw what Khamenei said, and you saw what the other leaders of the IRGC [Islamic Revolutionary Guard Corps] said. And so, again, we had to do this.

It’s like when the Russians moved the blood banks to the border and the New York Times said, well, I think they’re just saber-rattling. No, when you move blood banks and you move tankers, you’re going. It’s just a matter of when. How quickly are you going to go? It’s my opinion that it was going to happen immediately given the movements of our military assets. I certainly did not know, but it was a decent guess.

As we’re seeing in the aftermath of this initial ceasefire and a plan for a peace negotiation, it’s still fraught. It’s still volatile. There’s, of course, a lot of, I guess, a lot of actual uncertainty. Or do you view it that way?

Look, it pays all of us to really take note of all of the inputs here. And we’re not just talking about the fundamental, radical Islamic and Shia inputs of the Iranian regime. I’m talking about the financial inputs of the Middle East kind of writ large. But let’s talk about Iran.

Iran’s currency was pegged at $42,000 to the dollar for the longest time. And as of May, the Iranian central bank has moved that to $520,000, so $42,000 to $520,000. If you had any savings at all in the Iranian currency, it is gone. The black market rate is somewhere around $950,000 to the dollar.

You have to go back to COVID, when the U.S. expanded the Fed’s balance sheet from $4 trillion to $9 trillion in a very short period of time for the first time ever. Remember, the U.S. Fed’s balance sheet had never been above $1 trillion in its history before 2009. So from 2009 to 2022, we took our balance sheet from sub-1 to $9 trillion. And there’s a multiplier effect there in the Fed. I think we pushed roughly 50 percent dollar inflation to the world between 2020 and 2023 during the virus from Wuhan. And I think that in that time frame, the rest of the world has what I call a negative convexity to us.

So everything in the world is priced in dollars. So when you look at cross-border currency settlements and you think, well, there’s the dollar, the euro, the yen, the pound, there are all these other currencies. There really isn’t. There’s just the dollar. And the other currencies are back-solved for how they pay for things in their own country. That’s really the way the world works.

So when we push 50% inflation in dollar terms to the world, many of the countries that were kind of bouncing along the bottom or having trouble growing, they inflated more than we did. They had a negative convexity to our push. So when you look at Turkey, 90 million people, you look at Iran, you look at Pakistan, you look at Lebanon. Literally, the list goes on and on and on. Between 2020 and 2025, they’ve hyperinflated. Their currencies are now worthless.

So for anyone that begins one of these foreign policy arguments with us, all else being equal, we should be able to get to a ceasefire. There’s no ceasefire happening. There is nowhere to go back to. There is financial ruin everywhere because there is no stability anywhere in the world other than in the dollar. And we just experienced that 50% inflation in both the US and Europe. So you and I both know things are much more expensive today than they were pre-COVID, right?

So the whole world is destabilizing. Inflation is an insidious destabilizing force that I’m not sure people connect the dots between inflation and the stretching or tearing of the social fabric, either domestically or internationally. And so when you have a look at the Middle East writ large, there is no going back to kind of two and a half percent global growth. Everybody figures out how to get along, and we’re just going to go to a ceasefire.

My view is the ground war in Europe, I don’t believe there’s an off-ramp there. Are we going to sign another Munich deal, our Munich agreement where we kind of give Russia their advances and hope Putin doesn’t push further? Putin has told us he wants all of Ukraine. I mean, if Trump himself, the dealmaker, can’t get a deal done with Putin, then no one can get a deal done with him. That’s the way I look at it. Like, Trump’s really good at making deals. He can’t make a deal there.

And so you have the ground war in Europe. You have Iran and its illegitimate proxies against Israel and maybe the rest of the West. Who knows? And now you have China and Taiwan. You saw what happened in Taiwan over the weekend. Like, again, things aren’t going well. And when China moves on Taiwan, the world will further bifurcate. I think we all need to be planning for that day.

The rapidity with which Israel and the United States have, well, look, let’s just say Israel has been able to take Iran apart. And they’ve done it so brilliantly and with such precision that I think it certainly not only got China’s attention, I bet it unmoored China’s views of warfare, and especially what happened with the US. I mean, when you really understand what happened at Fordow and Natanz.

We had to drop those bombs down three ventilation shafts that had been covered up by the mountain. So they had built the shafts, then they had covered them with earth, and we had to drop them with precision down those three shafts from whatever altitude we dropped those giant bombs from. And we did it. We still have the best and most lethal military in the world, and we aren’t afraid to use it.

Leading through strength is a new deterrent for the relationship between the U.S. and Taiwan. You’ve seen the commander of the Indo-Pacific Command, Admiral Sam Paparo, say publicly, you know, if China thinks they’re going to either blockade or attack Taiwan, we will create a hellscape in the Taiwan Strait. So I think you see unambiguous messages from our leadership, even from President Biden four separate times saying we would certainly defend Taiwan.

I don’t know what Xi Jinping’s calculus is. We’re not dealing with someone that’s rational. We’re dealing with somewhat of a madman, just like we’re dealing with a madman in Putin, and we’re dealing with a madman in the Ayatollah, and we’re dealing with a madman in Kim Jong-un, and all the madmen are signing deals together and doing deals together. It’s a pretty fraught time. But I think the lesson from the Israel-Iran-US situation in Iran is going to make the Chinese think twice about being more belligerent on the military side with Taiwan.

There seems to be a scenario of increased stability, like kind of an expanded Abraham Accords being able to happen. But you’re basically saying that the financial volatility and this inflation that’s been pushed is actually going to negate that effect. Do I understand that?

What I’m saying is the countries that are most ill affected, like Iran, like Iraq, which is being run as a proxy by the Iranians and by the Shias, and the unstable regions of the Middle East will stay unstable. I think the stability of the relationship with the Saudis, the UAE, and the U.S. is the best it’s been since pre-Biden. I mean, as we all know, the Biden administration decided to turn their back on the Saudis. Our longest-standing ally in the Middle East, and give the bear hug to the Iranian regime and release the capital to them.

That was the most ill-fated, poor decision maybe that Biden made in his, well, I don’t know who made it. Maybe he made it. Maybe someone else did. But that administration made a really, really poor decision from a foreign policy perspective by alienating or turning our back on Saudi Arabia and embracing the largest sponsor of terror in the world. And I think we have now righted that ship.

So I do think when you look at the UAE growing north of 5%, when you look at Saudi Arabia and our newfound strong relationship again with Saudi Arabia. And you see very specifically the UAE in Q1 of 2024 said they were going to pivot away from China and that they were going to focus on the U.S. And you see the UAE embracing Europe and the U.S. You see Saudi Arabia embracing Europe and the U.S. And the Chinese had really taken our about-face in the Middle East and leveraged it.

Let’s hope the U.S. relationships with the Saudis and the Emiratis continue to prosper. But what I’m saying is the Shias in Iran, in Lebanon, and then the people of Pakistan and the governments that are being run by theocratic madmen are really going to have a tough time moving forward, Jan. There’s almost no safe harbor here to reconstruction unless you embrace this concept of some semblance of Western democracy and call it logical rule. If you go back to the theocratic roots, you’re certain to fail.

Let’s talk about the changes in the Chinese economic reality. Since we spoke five months ago, it seems like there’s been a lot of interest in that discussion. And I’d like to build on that because actually quite a lot has happened. I mean, this whole tariff regime. But let’s go back to what’s been happening with the Chinese economy even pre-Trump tariffs.

The Chinese economic situation is that they’re dealing with the largest economic crisis they’ve ever had. They’ve really only been at banking since their ascension into the WTO [World Trade Organization], 2002-ish. So we’re talking a little over two decades. And I give the analogy, we’ve been at banking for well over a century and look at how bad we got it in 2008.

Imagine if our system was more than two times levered than it was going into 2008, because that’s what we’re looking at in China. You know, we were on balance sheet about one times levered to our GDP. So the banks’ assets were about one times GDP. If you included the non-banks, the Fannies, the Freddies, and the non-banks, it was about 1.7.

The Chinese are at 3.2 today on balance sheet. And then you’ve got, you also have another $14 trillion market in the local government financing vehicles, how they finance themselves. When you look at total debt to GDP, China’s the worst offender in the world. So they’ve got more debt than they know what to do with. They’ve got their 10-year bonds trading at 160. They’ve got their overnight rates about 150. And ours are, what, 440 on the 10-year and call it 430 overnight. The Chinese government is pretty good at lying about whatever they want to lie about.

But the bond market kind of tells the truth. And the bond market’s telling you that China’s in an economic winter. And now you have a tariff situation. The only bright spot in China’s economy was their trade surplus. They ran about a $980 billion trade surplus last year. And $360 billion of that was from the U.S. So what’s functionally relevant is when you think about trade surpluses, that’s one component of China Inc’s net income.

When you think about a country, a sovereign, as if you try to think about it or hypothesize as a corporate entity, you have a few things, right? Creating your net income will be various components of your revenues. And one of their revenues is the trade surplus. One of their outflows or subtractors is the foreign direct investment and portfolio flows. So those can all be positive, or some can be positive and negative.

So when you look at China in 2024, they had a trade surplus of $980 billion, but they only had a current account surplus, call it a net income number, of about $520 billion. So they lost, or sorry, $400 something billion. So they lost about $500 billion in outflows. So even though they had a massive trade surplus and their surplus was up 22% from the year before, up in one year, they ran their surplus up 22% greater, but they also had a massive FDI and portfolio flow outflow.

Why do tariffs matter, Jan? If they ran roughly a $420 billion current account surplus, if we bring into question $360 billion of that surplus by putting restrictive tariffs on our trade, we can take their current account almost to zero if you think about that more broadly. So we are $360 of $980, but we are also $360 of the $420. So China’s one bright spot is now in question. As you’ve probably seen, year over year, trade with the U.S. is down about 35%.

I actually am surprised it’s not down more. But down 35% is pretty material with our trade relationship. So given all of those inputs, Jan, what I’m telling you is there’s nothing that’s going to bail China out of their economic spiral. We’re having a real estate crisis, a banking crisis, a youth unemployment crisis, and now they need to be worried about their current account.

For the record, you say that the debt to GDP is the worst in the world. Can you just lay out the components of that, the debt that you’re talking about?

When you look at on-balance sheet sovereign debt and then you add in the local government financing debt, we also give them the benefit of the doubt of conversion into the dollar at a fictitious rate, meaning a rate where they have a closed capital account. We give them that conversion for gratis. We don’t discount that at all. Chinese on-balance sheet debts to GDP are roughly 350 percent. I mean, again, a number that’s so difficult to deal with, especially when you’re having an economic crisis.

So on balance sheet, when you’re talking about yuan-based debt, like you’re seeing in their banking system and in their local government financing vehicles that aren’t dollar denominated. What you can do is you can just print the yuan. You can print a lot of them. You can abandon moral hazard and plug those holes. So what you’re seeing happen in that market, the PBOC [People’s Bank of China] announced that they’re going to put in place refinancing vehicles for about $1.6 trillion worth of the, call it, $14 trillion market. So more than 10% of the market, and it hasn’t helped that market at all, which is fascinating.

At the same time, there are still these deep international connections. I believe that this has indeed been Communist China’s project to basically insinuate itself into the global economy. If we go down, we’re taking you down with us, kind of idea, right? I don’t know what you think about that.

This is this concept of they’re so economically interconnected that basically they’re too big to fail. More importantly, that is because we’re so economically dependent on one another for various things that we’ll never have a conflict. I mean, how many times did you read that going into World War I and World War II? That was what the talking heads were saying: there’s no way we can actually go into a war. The world’s too economically interdependent. We’ll never have another big one. And I hear that chorus repeating yet again.

And yet, we actually share almost nothing in common with the Chinese Communist Party. We look at the world completely differently. We value basic human rights. We value the right to own real estate. We value law and order. We value so many things here that they just have no concept of over there. Everything is set at the benefit and for the benefit of the party chairman, Xi Jinping himself, so a very different world.

And when we don’t share values and always share economic leanings and we have outsourced just about everything to China, there’s a world in which the U.S. can actually turn that around and bring some of that manufacturing back onshore, which I think is certainly going to happen. And I think the world’s going to just be a different place. Just imagine if Xi Jinping were to leave Taiwan alone, how much better the world would be. If there was no threat or fear of a kinetic conflict with two of the world’s nuclear superpowers, I think we would all sleep better at night.

But in the end, Xi Jinping has told us since 2017 that he’s going to do this. And we have to be worried about it, and we should be concerned. We should also take him for his word. He’s said it enough times for me to believe it. At some point in time, he’s going to go. He’s told the PLA Navy and the PLA Army to be ready by 2027. Here we are in June of 2025. I mean, 2027 is pretty close.

Let’s talk about leverage. The CCP has demonstrated one point of leverage it has against the U.S. and the free world, which is the control of rare earths. They use that, it seems, as part of the current deal that we exist in. How do you even view, with everything you just described, what kind of a deal is it possible to make? But also given the realities that there are these different points of leverage, and I’d actually like to discuss that too. What are the points of leverage that the CCP has? What are the points of leverage that the U.S. has?

Mr. Bass:

The CCP has some key points of leverage. You mentioned rare earth metals, as they recently demonstrated rare earth magnets and the magnets that enable the EV engines to run. So they withheld those in the most recent trade kerfuffle. And they also did not report a lot; they did not report well on the lasers that are used to generate fiber optic signals, which are almost 100% made in China. And they’re withholding those from many of the folks that use those fiber optic lasers and things related to communications and computing.

So you’ve got some real single points of failure there. That’s not rocket science. It’s just us needing to create our own domestic capacity once again. And that requires the president to issue some orders. And you think there’s got to be some sort of Manhattan Project that we can engage in to fix these wrongs, to balance these imbalances. I think another one is synthetic graphite; synthetic graphite is in every single EV battery. We mine the raw materials in Louisiana, and we ship it all to China, and they handle 100% of the finishing. So things go from synthetic graphite to antibiotics to, you know, fiber optic lasers and rare earth magnets. So you feel like they’ve got a stranglehold on us.

With them, they import 13 and a half million barrels of crude oil every single day. They import nine BCF of LNG every single day. They import 40% of their food every single day, and they need access to the U.S. dollar system. That is a single point of failure on their part. They have a closed capital account. They don’t have the ability to purchase things around the world in yuan or RMB because no one accepts a currency they don’t trust or that doesn’t trade. They need convertibility into something else, so whether you look at dollars, euros, yen, or pounds, we’re really all talking about dollars.

So we hold the trump card over China, and we should be socializing this concept that, because again, deterrence is something that we should all be engaging in to try to stop China from being militaristically belligerent with Taiwan. They should know that one of our first moves, in the event that we know unambiguously that they’re moving on Taiwan, should be to simply remove them from the system. We can do so, and we can do so pretty easily.

Now, it’s a difficult button to press because, like you said, it’s going to hurt us, and it’s going to hurt them. There is no easy button, but there is a button we can press, and we will press it if they move. That is a better first move on our part than sending carrier strike groups of our brave men and women into the Taiwan Strait. In a kinetic conflict with China, as we all know, tens of thousands of our men and women will die if that happens. So let’s think about the non-kinetic ways in which we can effectuate some real pain on China.

That happens in the financial realm. It happens in the space realm. It happens in the cyber realm before it all happens in the kinetic realm. And those are things that we, as a country, are certainly thinking about and socializing right now. And it’s terrible that we are, because if Xi would leave Taiwan alone, we wouldn’t have to even talk about this. We’d be just talking about economic problems. Economic problems are much easier to solve when things aren’t happening kinetically.

Just looking at all the discussion and massive issues around the run-up to this when Israel went into Iran and then the U.S. had its actions, it might even be more confusing to people why you are so clear that Taiwan is an actual red line that America should consider, much as it does Israel.

We know that the Iranians have been building centrifuges right and left and looking to engage in moving enrichment from LEU [Low Enriched Uranium] to HEU [Highly Enriched Uranium], so anything over roughly 4%. Think about this. They have been spinning centrifuges since the late 1980s, and less than 1% of Iranian power comes from nuclear power. It is obvious what they’re doing, Jan. It is blatantly obvious that they’ve been lying through their teeth the entire time.

If you think about the JCPOA [Joint Comprehensive Plan of Action], two of the six players in the JCPOA are China and Russia. It’s the entire reason the UN has been neutered. It’s the entire reason that the World Bank has come off its rails. Every single supranational institution has been infiltrated by the Chinese. And the UN Security Council has two permanent vetoes. They have two members, China and Russia, that have permanent vetoes. If they’re the belligerents and they have veto power, then what good is the UN?

I worry about the supranational institutions of the world. That goes from the WHO [World Health Organization], to the World Bank, to you name it. The Chinese have infiltrated these things to neuter them. It was obvious, and it was a bipartisan agreement that the Iranians should certainly not have a nuclear bomb. And if you’re Israel and the Iranians have told you they want to wipe you off the map as soon as they get one, you know what they’re going to do. So it just takes leadership.

President Trump showed leadership and took the shot when it was the best possible time to take it. We knew the uranium had been enriched. We knew they were days or weeks away from having a bomb, and all of the airspace was open. I mean, it was a red carpet for us. And we really didn’t put anyone in harm’s way except for roughly the 50,000 troops or so that we have in the Middle East.

Let’s just say that we have contingency plans, as you saw with our largest base in the Middle East. That is where they shot the rockets at last night in Qatar. We had moved all of our planes and all of our people out of that base, starting roughly June 9th. Again, these are all public things. You don’t have to be a geopolitical genius to see what was coming.

For you, it seems obvious that the U.S. needs to protect Taiwan, but it might not be obvious to many of the viewers of this program.

Taiwan Semiconductor in Taipei is the most advanced chip company in the world. They make two-nanometer chips. And when you think about the scale of chips, the two facilities that Taiwan Semi is building in America, in Phoenix, are a five-nanometer facility and a three-nanometer facility. The only two-nanometer facility in the world is in Taipei. And this is a nonlinear relationship. So when you go from five to four, four to three, it’s a logarithmic change. It’s a huge change. It’s like the Saffir-Simpson scale or anything that’s nonlinear that we all talk about.

I think in this case, those chips are vital to the AI and quantum computer race. And basically, whoever cracks the quantum code, whoever wins the AI race, ends up owning the data of the world. Therefore, the West and the U.S. must win that race. And China is putting all they have into winning that race. Allowing China to simply take over Taiwan is something that is an existential national security crisis for the U.S. Our leadership needs to explain it a little better to the people. But it’s also even more than that.

For those of you who have read the book “Unrestricted Warfare” by the two Chinese generals, very few people have read that book, but it goes to show that the Chinese plan is to secure the first island chain, which includes Taiwan, and then, in a certain period of time, secure the second island chain and then be able to project power all the way to San Francisco from China. And I think that that is their plan. And we cannot allow that plan to happen. We can’t allow China to be the arbiter of everything that happens in Southeast Asia and Oceania.

We fought hard during World War II to bring peace to the world. And China is fighting hard, basically by hook or crook, in Oceania and in Southeast Asia. Remember, our longest-standing mutual defense treaty [MDT] ally in Asia is the Philippines. We put that MDT in place in 1951. Japan is an Article 5 partner. And so if Japan gets into a conflict, we are obligated to defend them. And Australia is one of our closest allies.

I can tell you that if and when China decides to blockade or attack Taiwan, the Japanese Minister of Defense has said this is the largest existential threat Japan has ever faced. Think about that comment for a second, Jan. Ever? Japan has faced some crises in the last hundred years. And so they are saying that this is bigger than World War II for Japan. That’s a pretty hyperbolic statement coming out of their defense minister.

So you can bet that Japan will immediately be involved. They can’t allow China to simply take by force a thriving democracy of almost 27 million people. The reason China hates Taiwan so much, if you really think about this, other than we know the historical facts of when the people went to Taiwan and left the mainland, they took a lot of the precious artifacts of many aspects of Chinese history. And that’s something that really gets under Xi Jinping’s skin.

But it’s much more important than that. Taiwan’s GDP per capita is three times what China’s is. Taiwan is actually an image of what China could be if they democratized. And that’s something that the Chinese Communist Party detests. They see such success in Taiwan because they’re a thriving democracy of ethnically Chinese people. Imagine if China were to embrace that sense of Western democracy and capitalism and also rule of law, how China would prosper. Instead, they’re taking it the other way and running it like an authoritarian regime. And I think Taiwan really bothers Xi with its success.

I often say that I think in the scenario you described, I think China would really give the U.S. a run for its money.

No doubt about it. If they were to really use our playbook to compete fairly in the world, they could do miraculous things. But instead, we’ve obviously seen where they’ve really shown their true colors since 2016, 2017.

I just recently had Chenggang Xu on the show. The interview is going to be published probably after yours because this is very timely. But it’s very difficult to explain to people how totalitarianism works and how it’s different even from something like what’s happening in Saudi Arabia, which would be an authoritarian system, how it’s foundationally different and how it kind of compromises the ability of any state that is running a totalitarian system to actually do the kinds of things you’re describing because that party supremacy basically takes over everything. All aspects of what happens in the state are subservient to that party supremacy. It’s very difficult for people to understand this.

Yes, having total control over the media, having total control over the military, having total control over the political realm, having all five tools of dictatorship firmly in one’s hand, you never want to give up any of those once you have that power. And she’s got it today. And all the plates that he had spinning are falling. And so the question is, what does he do next?

Those strategic vulnerabilities we talked about, if we as a country were focused on again righting those wrongs or balancing those imbalances, we could do so in about 18 months if we put capital and effort into the program. And I think when you see the Big Beautiful bill will pass July 4th, and if you really get into looking into that bill, I think you’re going to see it could be upwards of $200 billion focused on those problems we just talked about with White House orders, so we are on our way to fixing these problems.

Before I jump in on the big, beautiful bill for a moment, I saw that you and I both got interested in these recent gray zone fishing vessel activities, talking about unrestricted warfare in the Philippines. Actually, quite a bit of activity. This was flagged for me. I saw it was flagged for you as well. Just kind of explain to me that situation and this approach to warfare, just for the benefit of those that might not be familiar.

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Kyle Bass: China’s Economic Spiral and the Coming Taiwan War