Jim Chanos: This will lead to unraveling in China

China's credit event still to come: Jim Chanos
China's model broken: Jim Chanos
Commodities 'extremely inexpensive': Dennis Gartman
Chanos' new big short? Cheniere Energy

Longtime China bear Jim Chanos said Wednesday Beijing is running out of room to borrow, which at some point will lead to a "credit event."

"The debt is still growing two to three 'X' the economy every year," said the closely watched short seller and founder and president of Kynikos Associates, with $3.3 billion in assets under management.

Read MoreJim Chanos: New short position in Cheniere Energy

"One of the worries we've always had was they were going to lose control of their currency," said Chanos, who sounded the alarm on China in 2009. "That's why I think the markets took a real shudder in August" after China devalued the yuan.

The thin and leveraged stock market in China is not a barometer of the health of the world's second-largest economy because it's subjected to intervention by the government, Chanos said. The Chinese economic model of "state directed capitalism" is broken.

China growth has been going down 2 percent a year and that's expected to continue, Chanos asserted.

Market watcher Dennis Gartman was more optimistic than Chanos on China.

The markets have "exaggerated the slowdown and circumstances in China," Gartman told "Squawk Box" earlier Wednesday. "Give it two or three years and you'll see Chinese economic circumstances getting much better again."

Read MoreGartman: Nervous about stock swings, but not oil

The United States is the country "least effected by what's going on in China," said Chanos—unlike Beijing's Asian trading partners Japan and South Korea, and commodity exporters like Australia, Canada and Brazil.

—CNBC's Maneet Ahuja contributed to this report.