China is heading for further financial chaos. In the near future the yuan could lose a third of its value against the dollar, the government would need to print more than $10 trillion to keep banks liquid, and financial institutions are set lose trillions of dollars in equity value.

That’s according to a forecast by Kyle Bass, a US hedge fund manager who predicted the 2008 subprime mortgage crisis. In the end, he’s betting, China’s banking system will suffer a loss four times greater than that suffered by US banks during the great recession.

“What we are witnessing is the resetting of the largest macro imbalance the world has ever seen,” Bass wrote in a note to clients, seen by Bloomberg. “The problems China faces have no precedent… They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances.”

Bass, who founded and runs Dallas-based Hayman Capital Management, said that the risk to China comes from its banking system, which he says has used off-balance-sheet lending to grow its assets to more than three times the size (paywall) of the country’s GDP.

The expected number of non-performing loans—that is, loans that borrowers are not expected to be able to pay back—is so high that Bass anticipates $3.5 trillion being wiped from banks’ balance sheets. The government may then be required to print as much as $10 trillion to keep those banks liquid.

Foreign currency shortfall

In the letter, the hedge fund manager also outlined his opinion that China’s foreign currency reserves are much smaller than they appear. That’s because much of the $3.2 trillion China has in foreign currencies is tied up in other products or has been lent out, meaning it is not immediately retrievable. Ultimately, only around $2.2 trillion of that figure is on hand to the central bank, Bass wrote.

That matters a great deal because the central bank has been spending its foreign currency reserves at a pace of around $100 billion per month lately. It’s doing this largely to prop up the value of the yuan. Should the value fall, businesses are expected to export their cash out of China, in turn devaluing the yuan further and supporting a vicious free-fall.

Even with a war chest of $3.2 trillion, that kind of spending couldn’t last forever. But with about a third of it tied up and out of reach, Bass suggests, the point at which the central bank can no longer support the economy the way is has been will arrive much sooner.