China is facing its "worst financial situation" in 17 years, giving President Donald Trump major leverage in the ongoing trade war between Washington and Beijing, hedge fund manager Kyle Bass told CNBC on Tuesday.

"We are in our strongest negotiating position we've ever had against China," said Bass, founder and CIO of Dallas-based Hayman Capital Management.

The Trump administration needs to level the playing field on trade and "it looks like they are doing so," he added.

China can use government money and influence to control its domestic economy, "but the arbiter of the Chinese plan is their exchange rate with the rest of the world," Bass told CNBC's David Faber on "Squawk on the Street."

Bass, known for profiting and betting against subprime mortgages during the 2008 financial crisis, made a huge currency bet in 2016 against the Chinese yuan, predicting it would depreciate by as much as 30 to 40 percent.

In 2017, the Chinese currency rose nearly 7 percent against the dollar after three straight years of depreciation. However, since its recent top in March 2018, the yuan declined about 10 percent.

Hayman Capital was not immediately available for comment on whether Bass is still short the yuan.

"China is running the largest financial experiment the world has ever seen. And the economic tides have turned negative for them," Bass told CNBC.

In making his case, he pointed to first-quarter data that showed for the first time in 17 years China ran a current account deficit, meaning it imported more goods and services than it exported. (However, China still runs a massive trade surplus with the U.S.)

The negative overall current account "makes China desperately short dollars," Bass said, suggesting Beijing needs to figure out how to get more foreign investment into China.

Ironically, he argued, wealthy Chinese investors tend to put their money to work in the U.S.

"They love a rule of law. They love that their money cannot be taken from them," he said, while adding he thinks the U.S. still has the "best financial system in the world."