Faber, the notoriously bearish author of "Gloom Boom & Report", said he "completely disagreed" with O'Neill's view that there was no liquidity shortage in the world's second largest economy.
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The Shanghai Composite tumbled below the key 2,000 mark on Monday when the Chinese central bank refrained from pumping funds into the markets in order to ease liquidity concerns. The index pared losses on Tuesday on rumors that the central bank will hold a conference with regulators to address liquidity conditions, but still closed lower.
Despite the market uncertainty, O'Neill, who retired last month as chairman of Goldman Sachs Asset Management, dismissed the idea of a credit crunch.
"The notion that there's a genuine liquidity crunch is crazy. China's biggest underlying macroeconomic dilemma is that they save too much. If they wanted to bring rates down to zero they could do it in five seconds," said O'Neill, who coined the term BRIC, speaking from the International Capital Conference in Paris.
(Read More: Is China Right to Brush Aside Credit Squeeze?)
Faber said he "completely disagreed".
"I think China, if you look at the expansion of credit as a percent of the economy, had a colossal — not a small — a colossal credit bubble," Faber said, speaking from the FundForum International conference in Monaco.
"There are lots of poor credits in the system, because all kinds of companies, instead of manufacturing and making money out of manufacturing, resorted to financial transactions. In other words, they borrowed at low rates from the state banks and then they lent out to very questionable borrowers."
However, Faber and O'Neill agreed that the Chinese central bank's goal of 7.5 percent growth in 2013 looked optimistic.
"The Chinese economy will disappoint very badly, and I have maintained for a long time that the Chinese economy does not grow at 7.8 or 7.9 percent at the present time, but more likely at just four percent," said Faber.
(Read More: Is Meltdown in China Stocks About to Get Worse?)
O'Neill agreed that a 7.5 percent expansion seemed unlikely while the central bank was implementing reforms, but said growth would still be sizable.
"I don't think it's impossible that we could be looking at a couple of years of it [growth] being less, which in the big scheme of things is not that, big a deal," he said.
"I mean 7.5 percent growth: that is the equivalent of the U.S. growing by four percent. It is huge. They are trying to change a lot of things at the same time and obviously as they creep forward more through time it gets probably more hard to control."