Never a good idea to bet against the HK dollar
- Short-seller Kyle Bass, backed by one-time Trump pal and White House adviser Steve Bannon and fugitive billionaire Guo Wengui, has learned it the hard way
Most people don’t like short-sellers. I have a grudging admiration for a few of them. Others, not so much.
Few people would remember Sino-Forest today; I wish I could forget all about it. The bust in the early 2010s of this fraudulent company that claimed to own large swathes of forest for wood production in southern China marked the first big loss I had in the stock market; I am a serial loser when it comes to investing. I really should stop if I want to retire with a proper roof over my head.
For all that, I have to thank Carson Block, the US short-seller. He exposed Sino-Forest’s fake accounting claims. He did the research; countless other investors like me didn’t. Many of us thought it was the hottest ticket listed on the Toronto Stock Exchange.
Block has legions of enemies in China; some have reportedly threatened to kill him, as he has repeatedly singled out dodgy mainland companies, which he often successfully shorted. I think Sino-Forest might have been the kill that made his name. Hat tip!
The end of the dollar-based US empire will be a self-inflicted blow
Kyle Bass, another short-seller, is something else. I had to search for the popular German word schadenfreude when I read a hedge fund he managed lost more than 95 per cent of the US$30 million it invested, mostly by betting against the Hong Kong dollar after the breakout of violent social unrest in 2019. Two of his backers were former Donald Trump White House adviser Steve Bannon and fugitive billionaire Guo Wengui. In a related case, companies associated or controlled by Guo and Bannon have agreed to pay about US$539 million in a settlement with the US Securities and Exchange Commission (SEC) over claims that the companies illegally sold shares.
During the unrest, many Western commentators were declaring “the end of Hong Kong”; some still are. But Bass did one better by putting his money – well, investors’ money anyway – where his mouth was and went all out betting on a de-pegging of the Hong Kong dollar from the greenback under the linked exchange rate system, also called the currency board.
Most of us in or from Hong Kong just rolled our eyes. Writing on his Facebook page, former chief executive Leung Chun-ying said Bass didn’t know the basics about the currency peg. But Bass must have thought he had an insider’s take on the geopolitics of the whole thing from Bannon, despite the latter’s fallout with Trump.
After all, Trump and his secretary of state, Mike Pompeo, were then moving from trade war to cold war against China. There were talks about cutting off China’s access to the US financial system and forcing the dollar peg to collapse in Hong Kong. Bass must have thought he was doing a George Soros and a Stanley Druckenmiller when the pair went after Asian currencies and helped trigger the Asian financial crisis. He should have remembered that the shorts against the Hong Kong currency didn’t go well back in 1997-98.
A war film that says much about China and the US
Far from an insider’s view, Bannon and Guo were likely to have fed him their own ideological and revengeful take on China. His bet against the Hong Kong dollar was partly funded by investors’ money in GTV Media Group, which has ties with Bannon and Guo and which the SEC said raised US$339 million through an unregistered share sale. GTV was set up with the express purpose of supposedly exposing high-level corruption within the Chinese communist state. GTV’s parent company, Saraca Media Group, transferred US$100 million of the GTV proceeds to Bass’ hedge fund that bet against the Hong Kong dollar. Saraca and Voice of Guo Media separately made an unregistered sale of a digital asset security.
In a settlement with the SEC, GTV and Saraca agreed to pay disgorgement and interest of US$450 million and each will pay a civil penalty of US$15 million. Voice of Guo also agreed to pay disgorgement and interest of about US$54 million and a US$5 million fine. The agreements were made without admitting or denying any wrongdoing. Bannon, Guo and Bass were not named in the SEC case; neither were any of Bass’ fund management companies.
In a tweet posted in July last year, Bass said he was “not a director of GTV as of July 9”. In 2019, Bass was listed as chairman of the Rule of Law Foundation, a non-profit founded by Guo with the aim of bringing down the Chinese Communist Party and helping its alleged victims.
Is Hong Kong politics becoming like Squid Game?
Warren Buffett once said “never bet against America”. Interestingly, Wall Street is not betting against China. BlackRock, Goldman Sachs and JPMorgan have all advised clients to increase exposure to China.
BlackRock now wholly owns its Chinese mutual fund business. Goldman Sachs has just been licensed to run its fully owned securities firm in China. Morgan Stanley is raising its stakes in its mainland securities and mutual fund joint ventures, most likely with the goal of taking full ownership.
Great shorts have the courage of their conviction and are willing to go against the mainstream such as Wall Street. Bass, it seems, just got mixed up with the wrong crowd.
