KYLE BASS: There's a 'ticking time bomb' in China

Hedge fund manager J. Kyle Bass, the founder of Dallas-based Hayman Capital, has a warning about a "ticking time bomb" in the Chinese banking system.

Over the last ten years, China's banking system has grown from less than $3 trillion to $34 trillion, equivalent to around 340% of Chinese GDP.
"China’s banking system has grown from under $3 trillion to over $34.5 trillion in assets over the last 10 years alone. No credit system in history has ever attempted this rate of growth. There is no precedent," he added.
One way to bump that up is by offering wealth products like bank savings plans. They don't count towards the 75% cap, but they do generate income, and they often offer investors guaranteed interest and principal payments.
Bass highlights a specific kind of wealth product called Trust Beneficiary Rights. He said:

While the most publicized workaround has been the use of Wealth Management Products (WMPs) – devised to circumvent deposit rate caps and loan-to-deposit ratio restrictions – the most insidious is the use of Trust Beneficiary Rights (TBRs).

It's the TBRs that are the "ticking time bomb," according to Bass. The TBRs are being used to hide loan losses and it's being done away from the eyes of regulators.

Here's how Bass explains it:

When loans approach a nonpayment status, Chinese banks typically push them offbalance sheet. Without going into the nuances of exactly how this is done, the basic premise is that the non-performing loan is transferred to a 'Trust Company' while the bank continues to be the 'guarantor' (i.e. the bank retains all of the credit risk). In exchange, the bank records the 'asset' as a Trust Beneficiary Receipt or TBR.
What does this mean for Chinese banks? There is a bad answer and a worse answer. The bad answer is that Chinese bank capital – the equity buffer – is significantly overstated.

Now, the worse news. TBRs are one of the biggest ticking time bombs in the Chinese banking system because they have been used to hide loan losses.
Bass, who correctly predicted and profited from the mortgage crisis in 2008, thinks that China in the end will have to devalue its currency to handle this. Bass is among a handful of hedge fund managers betting against China's currency, the yuan. Much of Hayman Capital's fund right now is devoted to the yuan short.

He said:

The Chinese government has the capacity and the willingness to do what it needs to do to prevent a banking system collapse. China will save its banks, and the renminbi will be the valve for normalization. It is what any and every government would do if put into a similar situation. China should stop listening to Kuroda, Lagarde, Stiglitz, and Lew and start thinking about how to save itself from the impending disaster in its banking system.

Read more:

• A second barrage of missile strikes from Iran against US positions in Iraq has begun
• Jim Cramer’s latest election: Alteryx, Occidental Petroleum and more
• Arvinas, Dropbox, Trinity under the radar of insiders
• Put options for $11 million in a bet that the SPX will fall in December
• A deal is coming, but not the one we all expect