UBS has a warning for those, like Kyle Bass, who are making big bets on an imminent collapse in the Chinese banking system: The facts don't support such a catastrophic scenario.

That’s the message UBS economist Tao Wang is sending.

“While we acknowledge the seriousness of challenges facing the Chinese economy and exchange-rate regime currently, we don't think it as bad as some believe,” Wang said in a note Monday.

Wang is referring to high-profile investors like Bass, of Hayman Capital Management, who recently predicted that China’s day of reckoning is at hand and took a sizable short position on the yuan.

Wang cites multiple reasons why it may be premature to write off China.

For one, the renminbi, or the yuan, has appreciated from an undervalued level and it is only moderately overvalued at the current level, she argues.

“China has no intention to risk destabilizing domestic and global markets by using a sharp depreciation to promote exports,” she said.

She also believes China’s banking sector losses are smaller than expected and have sufficient liquidity to handle most contingencies.

But in the event the banks require capital injections, Chinese authorities are expected to take a more direct and decisive approach, rather than in the U.S., where the Federal Reserve handled much of the heavy lifting via quantitative easing.

“Fiscal policy can and will continue to play a bigger role for supporting growth [in China], and we believe the state will help recap the banks directly when necessary instead of beating around the bush,” said Wang.

The economist estimates that China’s banking sector is 340% of the country’s gross domestic product and a 10% loss is equivalent to 30% of the GDP, or about $3.5 trillion. Losses of such magnitude would require a massive bailout by the government. However, it will likely not reach that point, Wang predicted.

China’s banking assets include reserves held by the central bank and interbank loans, while credit to nonfinancial borrowers total about 230% of GDP last year. Of this amount, loans to the government accounted for more than 50%, while about 140% was to the corporate sector.

“Therefore, even a 10% NPL with zero recovery would still lead to a much smaller loss than suggested in a super bearish scenario,” she said, referring to non-performing loans.

And the key is that China doesn't need to mobilize its reserves to bail out the banks, contrary to what some investors believe.

In fact, the only reason the government may resort to using its reserves to stave off a banking crisis would be to bypass legislative approval. In previous incidences when the People’s Bank of China used reserves to recapitalize banks, the central bank exchanged its foreign assets for equity stakes in the banks. The Ministry of Finance then bought those shares from the PBOC via special bonds while the banks sold their foreign assets to secure domestic currency.

“In the end, all that changed in the People’s Bank of China’s balance sheet was an increase in claims on the government on the asset side, and an increase in money supply on the liability side, with no net impact on FX reserves,” she said.

According to the International Monetary Fund’s recommended criteria, China needs $2.7 trillion in reserves to shield the economy against major shocks and attacks. As of January, China’s foreign exchange reserves stood at $3.23 trillion.

Even aside from its reserves, the government can turn to assets held by its sovereign-wealth fund, China Investment Corp., or tighten capital controls which are already in place, Wang said.

The bottom line, according to the economist, is that China will “muddle through” as its economy slows but there won’t be a cataclysmic meltdown that some China bears will be counting on.