Kyle Bass, founder and principal of Hayman Capital Management, at the Sohn Investment Conference in New York in 2013. REUTERS/Brendan McDermid Texan hedge fund manager J. Kyle Bass, the founder of Hayman Capital, has sent his first letter to investors on a global scale in two years.

The letter, seen by Business Insider, warns that China has a problem much bigger than the subprime crisis in 2008.

Bass was one of the hedge fund managers who correctly predicted and profited from the mortgage crisis in 2008.

The problem in China, according to Bass, is the banking system and its coming losses.

"We have been vigorously studying China over the last year, with the view that the rapid credit expansion in the Chinese banking system will result in significant credit losses that will require the recapitalization of Chinese banks and materially pressure the Chinese currency," Bass wrote in a letter to investors dated February 10.

"This outcome will have many near-term and long-term effects on countries and markets around the world. In other words, what happens in China will not stay in China."

In the investor letter, titled "The $34 Trillion Experiment: China's Banking System and the World's Largest Macro Imbalance," Bass says China's banking system has similarities to the US banking system before the most recent financial crisis — excessive leverage, regulatory arbitrage, and irresponsible risk-taking.

Bass said he had met with Wall Street firms, consultants, and China experts and they all had the view that China would get through the recent turbulence without an economic reset.

That's not how Bass sees it. He wrote:

What we have come to realize through these discussions is that many have come to their conclusion without fully appreciating the size of the Chinese banking system and the composition of assets at individual banks. More importantly, banking system losses — which could exceed 400% of the US banking losses incurred during the subprime crisis — are starting to accelerate.

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.