"They'll hit that number in the next five months," he said in an interview on CNBC's "Squawk on the Street." "Those that think they can burn it to zero and they have many years ahead of them, they really only have a few months ahead of them before they get into a real danger territory."

On Wednesday, he said China's export-import industry requires China to maintain $2.7 trillion in foreign exchange reserves to continue operating smoothly, citing an International Monetary Fund assessment.

When that happens, central bankers will have to dip into China's $3.3 trillion of foreign exchange reserves to recapitalize the banks, causing a significant depreciation in the value of the yuan, according to Bass.

The premise of Bass' bet goes like this: China's banking system has grown to $34.5 trillion, equal to more than three times the country's GDP. The country is due for a loss cycle as cracks begin to show in its economy.

Hayman Capital Management founder Kyle Bass has been ringing the alarm bells about China's banking system and the yuan for months, and now he says the day of reckoning could be just months away.

Bass is best known for making a winning bet on the subprime mortgage crisis and later profiting from his call that the Japanese yen would fall in tandem with a projected round of monetary stimulus by the Bank of Japan.

Bass confirmed Wednesday he is devoting much of his fund to his bet the yuan will depreciate. He characterized shorts against the currency, including his, as totaling "billions."



The market will ultimately come to view a 10 percent yuan devaluation as "a pipe dream," he said. "When you look at the size of the imbalance and the size of their economy, it's going to go 30 or 40 percent in the end, and it's going to be the reset for the world."

To be sure, China's controlled devaluation of the yuan this year has sparked growth concerns that roiled equity markets around the world and contributed to the worst January for the Dow and since 2009.

Bass said he has no doubt the People's Bank of China has the ability to recapitalize the nation's financial institutions should they need bailing out. But the problem is that it will have to expand its balance sheet by trillions of dollars to do so, he explained.

Right now, too few people are focused on China's banking system, Bass said, but the narrative will swing that way this year.

Bass ticked off a list of concerns about the Chinese economy, including industrial production at financial crisis lows and the lowest nominal fourth-quarter year-over-year GDP print in 40 years.

"This isn't an aberration. This isn't a speed bump. This is China's excess — let's call it misallocation of capital — coming home to roost," he said. "You can't grow your banking system 1,000 percent in 10 years and not have a loss cycle. And your currency won't stay strong when you go to rectify that balance."