While many are watching its stock market, China's real problem may lie with its banking system, according to one hedge fund manager.

Kyle Bass, Hayman Capital Management founder and managing partner, told CNBC's "Squawk on the Street" on Tuesday that Chinese banks will likely experience losses that may affect the country as a whole.

"Those that are watching whether Chinese stocks go up or down aren't paying attention, in my opinion, to what the real problem is," Bass said. "And the real problem is the loans in this banking sector."

The hedge fund manager said that Chinese bank assets rose about 400 percent since 2007, and are now about $31 trillion against an economy with a gross domestic product of $10 trillion.