China’s banking system is in free fall and the country’s real estate losses could hit $4 trillion, veteran investor says

• China’s banking sector is in free-fall, according to market veteran Kyle Bass.

• The Hayman Capital CIO estimated China could see at least $4 trillion in real estate losses.

• An unchecked boom in real estate development in China has led to a deep crisis, experts say.

China’s banking system is collapsing, and the real estate crisis in the country could end up wiping out $4 trillion from its financial system, according to veteran investor Kyle Bass.

In an interview with Andrew Ross Sorkin on CNBC on Monday , the Hayman Capital Management CIO pointed to China’s property sector, which has been reeling in recent years as debts from major property owners sour and some firms default on their bonds. The real estate crisis has left enough empty homes in China to house 3 billion people, a former top Chinese official said, and the flood of unused supply will generation huge financial losses in the real estate sector.

Those losses are bound to have a big impact on China’s banking system, which is highly-levered, Bass said. Meanwhile, China’s local real estate market is mostly financed through local government financing vehicles, a market worth around $13 trillion, though much of that debt financing now in default, Bass said.

That suggests China’s banking losses could dwarf those seen in the US during the Great Financial Crisis, when US banks lost around $700 billion.

“”We think that [China’s] real estate losses are $4 trillion at least. And the local government financing vehicle market, we don’t even know where the bottom to that market is,” Bass said. “To have a properly functioning capital market, you have to understand the banking system, and their banking system is in freefall right now.”

Experts have warned that China’s property sector could be troubled for a long time. Developers in the country embarked on a massive building spree in the last decade—much of it financed with debt—and that supply now has vastly surpassed the demand for housing. Real estate woes could take up to a decade to solve, one economist estimated, as China is facing a wide array of economic headwinds that will stunt its growth.

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