Kyle Bass says investments in Chinese firms are not safe: 'Imagine what kind of fraud is behind these companies'

• Hedge fund manager and Hayman Capital Management founder Kyle Bass said the U.S. needs to crack down on the "insane" nature of U.S.-China business standards.
• "Imagine what kind of fraud is behind these companies," Bass said Monday.
• About $2 trillion worth of Chinese entities are listed in the U.S., and about $1 trillion of American capital is estimated to be moving into China by 2021.

Chinese companies do not deserve to be listed on U.S. stock exchanges if they don't adhere to the same standards as every American company, said hedge fund manager and Hayman Capital Management founder Kyle Bass.

With about $1 trillion of American capital moving into China by 2021 and around $2 trillion worth of Chinese entities listed in the U.S., Bass said the U.S. needs to crack down on the "insane" nature of U.S.-China business standards.

"Imagine what kind of fraud is behind these companies," Bass told CNBC's "Squawk on the Street" on Monday. "All of the U.S. money that goes into Chinese companies, it goes into companies that don't operate under a rule of law."

In the latest development in the U.S.-China trade war, reports on Friday said the White House is weighing some restrictions on U.S. investments in China. The discussion includes delisting Chinese companies from American stock exchanges and preventing U.S. government pension funds from investing in the Chinese market.

White House trade advisor Peter Navarro told CNBC's "Squawk Box" on Monday that the reports were "fake news." And over the weekend, a Treasury spokeswoman said "the administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time."

"Forget about delisting we should deregister these companies," Bass said.

China signed a memorandum with the U.S. in 2013 that exempts Chinese companies from submitting to U.S. audits and Dodd Frank laws, which Bass said should immediately be corrected.

Bass, known on Wall Street for his bets against subprime mortgages during the 2008 financial crisis, is also a noted China bear.

"This doesn't have anything to do with imposing pain on anyone," said Bass. "Lets raise Chinese companies' standards up to ours just so that U.S. investors are protected in the long run."

Bass praised the "Equitable Act" from Sen. Marco Rubio, R-Fla., which contemplates a delisting Chinese companies if they can't adhere to U.S. audit standards.

Bass also said Monday that a U.S.-China trade pact short of real reform would be the "dumbest deal Trump has ever done."

Correction: White House trade advisor Peter Navarro told CNBC's "Squawk Box" on Monday that the reports were "fake news." An earlier version misstated his title and what program he appeared on.