China already faces asset bubbles, and if it doesn’t deal with them soon, it will face a debt crisis, says George Magnus, senior economic adviser at UBS.

“While we’re dealing with the consequences of a debt crisis that’s already happened, China is stirring the ingredients of its own debt crisis,” he told Bloomberg.

China is doing that through the creation of unprecedented amounts of credit, Magnus said. “We should know that these credit booms do eventually end in tears, unless they’re adequately contained in the process.”

It’s a matter of how China deals with its asset bubbles, he says.

“The issue is whether they let it run or try to put the brakes on in the first half of next year,” Magnus explains.

“My suspicion is that they’re going to let it run. In that case, the brakes will be come on harder, but maybe not until late 2010 or even 2011.”

Meanwhile, the rest of the world will have to deal with sovereign debt issues next year, Magnus says. “It’s bubbling away.”

The problem is to strike a balance between reducing government debt and not choking off economies, he says.

Magnus isn’t the only one worried about sovereign debt.

"2010 is probably going to be a tumultuous year for sovereign risk," Pierre Cailleteau, Moody's global head of sovereign ratings, told Reuters.

"Long-term interest rates will rise globally, which will reveal the real costs of the financial and economic crisis."