Hedge fund manager Kyle Bass: Our relationship with China has taken 'major step' for the worse

Key Points
  • Hayman Capital's Kyle Bass said two events have negatively affected the U.S.-China relationship.
  • The Trump administration on Thursday announced sanctions on a Chinese firm and two Chinese citizens.
  • On the same day, the Trump administration told Congress of plans to sell $1.42 billion in arms to Taiwan.
Kyle Bass spots 'tectonic shift' in US relationship with China

One prominent hedge fund manager and bear on China said Friday that this week's developments in U.S. and Chinese relations signify a "tectonic shift."

"I think it took a major change, a major step for the worse yesterday," Hayman Capital Management's founder and chief investment officer, Kyle Bass, said on CNBC's "Squawk Box." "And I find all of the optimism to be questionable."

Bass noted that the U.S. on Thursday announced sanctions on a Chinese firm and two Chinese citizens for their dealings with North Korea. Also on Thursday, the Trump administration told Congress of a proposed $1.42 billion in arms sales to Taiwan, Reuters reported, citing a U.S. State Department spokeswoman.

Taiwan's independence from Beijing is a red-line issue for China.

"We firmly oppose the arms sale to Taiwan," China's Foreign Ministry spokesman Lu Kang said in a press briefing Friday. "We urge the U.S. side to abide by its solemn commitment to the 'one China' principle, stop the arms sales to Taiwan and any military contact to avoid further damage [to] our relations, and important cooperation in other fields."

In December, the President-elect Donald Trump took a phone call with Taiwanese President Tsai Ing-wen, challenging the decadeslong U.S. policy of officially recognizing Beijing, rather than Taiwan, as the seat of Chinese rule. Trump also has threatened significant tariffs on U.S. imports from China and said he wanted to label China a currency manipulator.

Trump reversed some of those positions in the last several months. But he appears to have resumed some of that tough stance on China, especially since North Korea shows no intention of scaling back on nuclear weapons development.

Since China is North Korea's largest trading partner, Trump has tried to put pressure on Beijing to act. However, Trump tweeted last week that "it has not worked out." On Friday, Axios reported the White House is "hell-bent" on potentially imposing tariffs of around 20 percent on steel and other imports from countries such as China.

The U.S. is also less likely to reach out to North Korea on its own. Last week, American college student Otto Warmbier died at age 22, less than a week after being released in a coma by North Korea, following months of captivity there.

Now, "I think any meetings with North Korea are now off," Bass said.

China has taken some steps to put economic pressure on North Korea, including suspending coal imports. But the world's second-largest economy also has retaliated against South Korean businesses for allowing the U.S. to deploy a missile defense system in the southern part of the Korean peninsula.

The installation of that missile defense system has apparently prompted Beijing to call off planned talks in late July with South Korea and Japan, as Japan's Asahi Shimbun newspaper reported Thursday, citing government sources.

Trump is scheduled to wrap up a two-day meeting Friday with newly elected South Korean President Moon Jae-in at the White House.

On Friday, Bass also reiterated his worries about unsustainably high debt levels in China.

"They're doing things to try to tweak their trade relationship with the U.S., but more importantly, their newfound strength globally, both economically and as you see militarily in the South China Sea, is all based on their belief in their economic strength," Bass said.

"All that is built upon a massive credit expansion that they're going to have to come up" against, he said.

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— The Associated Press contributed to this report.

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