Hayman Capital Management founder Kyle Bass joined the "Halftime Report" traders to discuss his 2016 market outlook, and what volatility in China means for the United States.

Many consider peaked profits to be behind China's slowdown. Bass, on the other hand, thinks the root of the problem is actually China's banking system. He compares what is happening in China to the recent European crisis. In both cases, banking systems outgrew GDP at a staggering pace: China's banking system is almost $35 trillion dollars, against a GDP of just $10 trillion. A credit cycle and losses are coming, he thinks, and investors are not worried enough.

Taking a bearish look at the U.S. markets, he believes we'll see a 10-20% downturn by year-end. It won't be as bad as the global financial crisis, but the lack of credit growth in emerging markets is a real problem.

Avenue Capital's Marc Lasry--also on today's show--agrees that Chinese banks have lent too much money.

Trader disclosure: On January 8, 2016 the following stocks and commodities mentioned or intended to be mentioned on CNBC's "Halftime Report" were owned by the "Halftime Report" traders:

Josh Brown: Long AAPL, BABA, DE, DNKN, FB, JMBA, LOW,NFLX, SAM, SHAK, SPWR, TWTR, XLE, XON

Steve Weiss: Long AAL, C

Jim Lebenthal: Long AAPL, BA, C, CSCO, DCO, EEQ, GAIA, GM,INTC, JCP, KMI, MPC, OA, ORBC, PFE, QCOM, QRVO, SPLS, TIF, TRN, WGO

Marc Lasry: Long DYN. Bonds in AAL, CHK, CPN, M