Hedge fund manager Kyle Bass has a theory about what could happen to credit growth in Asia over the next couple of years. And he has a trade strategy to match.
The Hayman Capital Management founder and managing partner told CNBC's "Power Lunch" on Friday that Chinese banks have grown too large compared to the country's GDP. He said a natural result of this would be a loan-loss cycle. "And if that's the fact, then credit fueled growth in Asia is going to take a breather and have a little bit of a decline," he said.
"There are a lot of institutions in Asia that lend aggressively to China," he said. "I think the Asian banks are going to see severe trouble over the next two years." But, he added, "it's not the end of the world."
Bass said he is not short Chinese banks, but rather the "rest of the financial institutions in Asia," specifically those are not in China and Japan, but that lend to China. He declined to give any specific names.
He forecasts that Chinese banks have gotten too big and that they will eventually "lose all of their equity." But China has the ability to deal with it through financial resources and a government committed to recapitalizing its banks. It would mean an end to double-digit credit growth in China, he said.
"And if credit isn't growing at double digits in China, then it's not growing at double digits in the rest of non-Japan Asia," he explained.
That is what could bring down the other financial Asian institutions Bass is short, he explained.