Hedge fund manager J. Kyle Bass, the CIO of Hayman Capital Management, says that China could face a problem that's three to four times bigger than the 2008 subprime crisis if the global economy enters a recession.
Bass, who gained notoriety for correctly betting against the U.S. subprime crisis, has been vocal about what he views as China's "recklessly built" banking system. In a 2016 investor letter, he highlighted Chinese banks’ pursuit of excess leverage, regulatory arbitrage, and irresponsible risk-taking.
In an interview with Yahoo Finance, Bass drew comparisons between the 2008 crisis, and what might happen if world’s second-largest economy hits a rough patch — which may happen as the U.S-China trade war escalates.
"In our crisis, we had $17 trillion worth of assets on balance sheet in our banks, and if you include non-banks, like Fannie and Freddie, let's say we had $23 trillion,” Bass said on Monday.
“We lost about $850 billion of equity in our banking system in our financial crisis. China has $53 trillion worth of [yuan] of assets in their bank, and their economy is only $13 [trillion],” he estimated.
“I mean, guys, we lost less than $1 trillion,” the investor added. “I think they're going to lose $3 to $4 trillion if they have a crisis.”
U.S. banks are in solid shape since the Great Recession ended, but haven’t been confronted with a bad economy in the 10 years since.
The battle between the U.S. and China has fanned fears that a slowdown might become a recession, but Bass said he wasn’t overly-concerned about the impact on the banking sector.
"The U.S. is in great shape. We can weather a recession. We always do," Bass said. China, however, could be a different story.
"I think over there it's going to be much harder to weather the enormity of the credit crisis they are facing,” he added.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.