China's central bank sent global markets reeling when it attempted tighten credit and rein in the country's shadow banking system. But the consequences of China's credit binge may just be getting started, and experts say there could be more pain to come for the world's second-largest economy.

"We've been seeing tightening since the end of last year," said Leland Miller, China Beige Book International president. "This is not a spur of the moment decision by the central bank."

Leland said the higher interbank lending rates are an indicator of a tension in the system. "The credit transition mechanism is broken and until that's fixed, there will be no happy endings in China," he said.

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China Bears

For some international investors, China uncertainty has been reason to avoid the country's equities altogether. Rajiv Jain, manager of the Virtus Foreign Opportunities Fund, told attendees at the Morningstar investment conference earlier in the month that he was "very concerned about the risk coming from China's shadow banking system."

In his first-quarter investment commentary, Jain wrote, "In our view this level of (China) credit growth is unsustainable. There is bound to be a significant contraction in credit and, with it, GDP." He added that the risks are systemic.

That has him thinking defensively about China and investing in companies that do most of their business domestically, Indian banks for instance, and downplaying commodities-related companies that rely on demand from China.

"If a debt-induced economic downturn takes hold in China, it inevitably will have a negative effect on commodity prices as marginal demand slackens or even falls," Jain wrote. "Lower commodity prices would lead to lower income and reduced investment in exporting countries."

Those countries include Indonesia, Malaysia, Brazil, Canada and Australia.