China's Colossal Credit Bubble Next Big Risk: Faber

The next major risk for investors is China's "colossal credit bubble," Marc Faber, editor and publisher of The Gloom, Boom & Doom Report told CNBC on Thursday.

Many investors turned bearish on the world's second largest economy last year after China clocked some of its lowest growth numbers in more than a decade, but a rebound in the final quarter that coincided with the announcement of the new leadership changed that mood. An evidence of that change in sentiment was the benchmark Shanghai Composite Index that rallied close to15 percent in December.

But Faber warns that a mounting credit bubble in China remained a crucial risk for investors in the Asian powerhouse.

(Read More: Less Is More: The Message China Must Heed)

"Whether they [Chinese government] can ensure continuous growth will depend on reforms and how to deflate the colossal credit bubble we have in China. This is going to be a huge problem because we have so much underground credit, questionable loans outstanding and questionable investments," he said.

Western rating agencies have warned that a rapid rise in off-balance-sheet banking activity is a threat to China's financial stability, the Financial Times has reported.

(Read More: China's Brokerages Turn Shadow Banks)

Faber's concerns also echo a warning from the World Bank in December, which argued that China faces the risk of a return to overheating, as loose monetary policies in Western economies trigger a flood of capital into the region, potentially leading to asset bubbles and excessive credit growth.

(Read More: Beware 'Credit Supernova' Looming Ahead : Gross)

A woman sits at a securities exchange in Huaibei, central China's Anhui province.
STR | AFP | Getty Images
A woman sits at a securities exchange in Huaibei, central China's Anhui province.

China's recent strong export numbers, which blew past market expectations, were also a cause for concern for Faber.

China's export data for February showed a 21.8 percent year on year spike, in contrast to analyst expectations of 10.1 percent. However, the reliability of this data has been questioned due to its inconsistency with neighboring countries' data including South Korea and Taiwan, among other things.

(Read More: Three Reasons to Doubt China's Export Numbers)

Faber said he expected China's economic growth to be much lower in reality, and even hinted towards a recession in some sectors of the economy.

"I think the economy has slowed down a lot...but they will not miss their 7.5 percent target, they will announce it, but the reality will be much lower. If you look at the statistics that are more reliable like Korean, Japanese or Taiwanese exports... then export figures from China don't add up entirely," he said.

"The economy in China will slow down and we may even have in certain sectors a recession... The question is about the future. I think China will still grow but there will be bumps along the road and political issues," he added.

China's economy grew 7.8 percent in 2012. The Chinese government has set a growth target for 7.5 percent for 2013, though most analysts foresee China overshooting that target and growing at around 8 percent.

Katie Holliday is a writer for CNBC. Follow her on Twitter @hollidaykatie