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.
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit. Read the latest financial and business news from Yahoo Finance