KYLE BASS: America's relationship with China just took 'a major step for the worse'

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kyle bass

REUTERS/Brendan McDermid

Kyle Bass, founder and principal of Hayman Capital Management, L.P., in 2013.

Kyle Bass, the founder of hedge fund Hayman Capital Management, isn't optimistic about the United States' relationship with China, a market he is famously short on.

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"Yesterday kind of signified a tectonic shift in the US relationship with China," Bass told CNBC's Squawk Box Friday morning.

"When you think diplomacy and the manner in which we handle our relationship with China, I think it took a major change, a major step for the worse yesterday. I find all of the optimism to be questionable."

Specifically, Bass pointed to yesterday's $1.42 billion deal to sell weapons to Taiwan, which angered Chinese leaders in Beijing.

The US on Thursday also imposed sanctions on two Chinese citizens and a shipping company, which they accuse of aiding North Korea's nuclear missile program.

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Bass has been shorting China since February of 2016. So far, it's not paying off.

The country's banking system is still fragile, with the total value of bad loans grossly outsizing total banking assets, according to Bass. He expects the yuan to fall 30% against the dollar once those problems reach a breaking point, which has yet to happen.

"They're doing things to try to tweak their trade relationship with the US," he said. "But more importantly, their newfound strength globally, both economically and as you see militarily in the South China Sea, is all based on their belief in their economic strength."

Chinese President Xi Jinping met with President Trump in April at his resort in Mar-a-Lago, Florida, but details of the leaders' discussions are scant. The Taiwan deal and increased sanctions are sure to further complicate the two countries' relationship.