A Chinese credit crisis would see the country's banks rack up losses 400 percent larger than the hit U.S. banks took during the subprime mortgage crisis, storied hedge fund manager Kyle Bass has warned in a letter to investors.
"Similar to the U.S. 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 percent of the U.S. banking losses incurred during the subprime crisis - are starting to accelerate."
China's banking system has grown to $34.5 trillion in assets over the past 10 years, from a base of $3 trillion, wrote Bass, who is famed as one of the few major investors to correctly call the U.S. subprime housing collapse that kicked off the 2008 global financial crisis. That prescience earned him a mention in Michael Lewis' book "Boomerang," which was about the European credit crisis.
This expansion in the banking system's asset base was fueled largely by rapid credit expansion, Bass wrote, that helped fund the huge, and often inefficient, infrastructure spending program that has propped up China's growth.
"China's [banking] system is even more precarious when we realize that, even at the biggest banks, loans are not made to borrowers based on their ability to repay," he wrote. "Instead, load decisions are political decisions made by the state."
Add to this the danger posed by China's shadow banking system - made up of instruments Bass claimed the country's banks used to subvert restrictions on lending - and the upshot was there were "ticking time bombs" in China's banking system, the hedge fund manager explained.