A Chinese credit crisis would see the country's banks rack up losses 400 per cent larger than those run up by US banks during the subprime mortgage crisis, storied hedge fund manager Kyle Bass said in a letter to investors.
"Similar to the US banking system in its approach to the Global Financial Crisis (GFC), China's banking system has increasingly pursued excessive leverage, regulatory arbitrage, and irresponsible risk taking," Bass, the founder of Dallas-based Hayman Capital, wrote in the letter dated Wednesday.
"Banking system losses - which could exceed 400 per cent of the US banking losses incurred during the subprime crisis - are starting to accelerate."
China's banking system has grown to US$34.5 trillion (S$47.89 trillion) in assets over the past 10 years, from a base of US$3 trillion, wrote Bass, who is famed as one of the few major investors to correctly call the US subprime housing collapse that kicked off the 2008 global financial crisis.
"Chinese banks will lose approximately US$3.5 trillion of equity if China's banking system loses 10 per cent of assets. Historically, China has lost far in excess of 10 per cent of assets during a non-performing loan cycle," he wrote. He noted that US banks lost around US$650 billion of their equity throughout the global financial crisis.
The letter said that the Bank for International Settlements estimated that Chinese banking system losses from the 1998-2001 non-performing loan cycle exceeded 30 per cent of gross domestic product (GDP).
"We expect losses in this cycle to exceed prior cycles. Remember, 30 per cent of Chinese GDP approaches US$3.6 trillion today," he warned.
Bass wrote that he expected the massive losses to force Beijing to recapitalize Chinese banks and sharply devalue the yuan.
"China will likely have to print in excess of US$10 trillion worth of yuan to recapitalize its banking system," he said.
The hedge fund manager didn't return an email sent outside office hours requesting comment on the investor letter, which the Wall Street Journal reported was his first in two years.