Kyle Bass is the founder and chief investment officer of Hayman Capital Management, a hedge fund based in Dallas. Bass rose to prominence after he correctly predicted the collapse of the U.S. housing market before the 2008 financial crisis, earning his firm significant profits when the market fell apart. Because of this track record, many investors and policymakers pay close attention to his warnings about financial risks.

In an interview on EpochTV’s American Thought Leaders on June 26, Bass made his most forceful statement yet about China’s current economic troubles. He said, “There is nothing that is 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.”

What Does an Economic Spiral Mean?

When Bass describes China as being in a “spiral,” he means that the economy is stuck in a loop where each problem makes the next one worse. In this case, collapsing real estate values, rising debt, and falling exports are feeding each other. These pressures reduce consumer confidence, and as people spend less, companies make less money, causing them to lay off workers or cut wages. This further reduces spending, deepening the crisis.

This is not simply a slow period of growth. Bass and others argue it is a breakdown of the entire economic model China has relied on for decades.

Bass described deflation as “an economic winter” in China. He explained that prices are dropping “not because productivity is rising or technology is improving,” but because “companies are desperate to shift stock and survive.”

When prices fall month after month, companies lose revenue and have to cut costs. They may freeze hiring or lay off workers. Consumers who fear losing their jobs or earning less money delay purchases, hoping prices will fall further.

U.S. Tariffs are Driving the Crisis

A big cause of China’s problems is the trade war that started under President Trump. In the past year, tariffs on Chinese goods have reached 145 percent, the highest level in a century. These tariffs have crushed demand for Chinese exports in the American market.

Bass emphasized that China’s once-powerful trade surplus with the United States has been severely weakened. “China’s exports to the United States plunged by 35 percent in May compared to a year earlier,” he said. “China’s once bright spot is now in question. I actually am surprised it’s not down more.”

To keep factories running, Beijing has been encouraging companies to dump unsold exports onto the domestic market. This means goods meant for American consumers are now flooding Chinese store shelves at steep discounts. JD.com, one of China’s largest online retailers, has pledged the equivalent of $28 billion to help exporters sell leftover products to Chinese shoppers, offering discounts as deep as 55 percent.

While this strategy clears warehouses in the short term, it is also pulling prices down even further. Barclays Bank economist Yingke Zhou said, “The side effect is a ferocious price war among Chinese firms.”

Bass noted that tariffs are only part of the problem. China’s real estate sector has been in crisis since 2021, when developers Evergrande and Country Garden collapsed under massive debts. That collapse wiped out trillions of dollars in household wealth and damaged confidence in the housing market.

China is also facing a banking crisis. Local governments and state-owned firms are saddled with debt, which Bass estimates at 350 percent of GDP when combined. That is one of the highest debt levels in the world.

Youth unemployment is another severe issue. As of this year, more than 16 percent of young people are out of work. The broader unemployment rate has also climbed to 5.7 percent, the highest in two years.

Bass believes the bond market reveals the truth behind the Chinese Communist Party’s official numbers. While Beijing claims the economy is stable, the yield on China’s 10-year sovereign bonds has fallen to just 1.64 percent. In comparison, U.S. 10-year Treasury bonds yield 4.26 percent. “The bond market kind of tells the truth, and the bond market’s telling you that China is in an economic winter,” he said.

Proponents of Bass’s warnings argue that these problems are the price China is paying for decades of predatory trade practices. For years, China used subsidies, currency manipulation, and intellectual property theft to build its industries at the expense of American manufacturing.

To these critics, the tariffs that President Trump imposed were necessary to stop this exploitation. Now, they say, the consequences are showing up clearly. As Bass put it, “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.”

Bass also called on the U.S. to use its control over the dollar system as leverage if China attempts to invade Taiwan. He said, “The United States should signal to Beijing its intention to sever China’s access to the dollar system the moment the regime initiates military action against Taiwan.”

Skeptics and Counterarguments

Not everyone agrees with this grim assessment. Economists like Justin Yifu Lin from Peking University argue that China still has policy tools to rescue the economy. Lin said that Beijing can “use fiscal, monetary and other targeted policies to boost purchasing power.”

He also pointed out that it could take the United States years to rebuild domestic manufacturing, suggesting that China’s dominance in production is still an advantage.

Some economists think the Chinese government has deliberately delayed big stimulus measures because they do not view deflation as a crisis. Wang Dan of Eurasia Group said, “Authorities do not view deflation as a crisis, instead, [they are] framing low prices as a buffer to support household savings during a period of economic transition.”

Still, even many of these experts admit that if the price declines go on too long, they will reshape behaviors in ways that are hard to undo.

China’s troubles are not confined within its borders. As the world’s second-largest economy, China’s deflation could spill into global markets, driving down prices of goods worldwide and triggering more competition among manufacturers.

Bass believes this will ultimately limit China’s power and serve as a warning against military aggression. “Deterrence is something that we should all be engaging in to try to stop China from being militaristically belligerent with Taiwan,” he said.

Whether Beijing can turn this situation around or whether the spiral continues will be one of the defining economic stories of the next decade. For now, as Bass concluded, “There is nothing that is going to bail China out of their economic spiral.”

ACZ Editor: This would be more of a crisis in the U.S., but the simple fact is that Chinese leadership is more concerned with retaining power than it is with the welfare of its people. They may indeed pivot to a better economic situation, but to aid this process, China may very well increase its mechanisms of oppression to keep people calm.