The Evergrande crisis and China's regulatory crackdowns are shaking the notion that China is an investable market, says Mohamed El-Erian

• Stocks worldwide slid as Chinese property developer Evergrande faces a $300 billion debt default.
• Beijing hasn't stepped in yet to help Evergrande, rattling the notion that China will back the financial sector, economist Mohamed El-Erian said Monday on CNBC.
• Risk assets dropped in a correlated fashion which hasn't happened in "a very long time," he said.

A selloff in global equity markets Monday suggests investors are reconsidering how sustainable it is to invest in China, renowned economist Mohamed El-Erian said on CNBC.

El-Erian cited Beijing's continued regulatory crackdown and property developer Evergrande, which has been working to avoid defaulting on a massive $300 billion in debt due Thursday. The real estate developer, China's second largest, has reportedly begun offering to repay investors with discounted properties.

Fears about Evergrande collapsing and hurting the broader Chinese economy sent Hong Kong's Hang Seng index sliding 3.3% as property stocks sank. During the US session, the S&P 500 tumbled at least 2% and the Dow Jones Industrial Average lost more than 800 points. In Europe, Germany's DAX slumped more than 2%.

Contagion from the Evergrande real estate crisis has already been showing up in the markets, said El-Erian, who noted that Evergrande's potential collapse arrives as Beijing has imposed restrictions and rule changes on a wide range of companies in recent months. It has urged tech firms, education providers, food delivery services, and more to reform their business practices, with the consistent theme of the state asserting control over the corporate sector.

"[We] see it because what's happening in China is shaking key tenants of this global investment theme. You know, it's easy to say the Chinese government is trying to strike the balance between one the one hand punishing excessive risk-taking, and, on the other hand, not having a systemic event. That's easy to say. To do is much harder," said El-Erian, chief economic advisor at Allianz and former CEO and co-CIO of bond giant PIMCO.

"And what that results in is people are questioning one of the tenets - which has been the government will always stand behind the financial sector - it's not. Not at least as yet. Now add to that what has been an attack on various sectors … and it's shaking this notion that China is an investable market."

El-Erian said China's market is undergoing a transition period and there's talk among investors that Evergrande could represent "the Lehman moment" for China, referring to the collapse of the US investment bank that prompted the 2008 global financial crisis.

"I don't think we're there," he said of another 2008-style financial crisis, "but that [sentiment] is out there," which leaves open for now the question of whether investors' faith in the long-term prospects for investing in Chinese markets will be permanently shaken.

"But remember the context is important," said the economist, noting that China's economic growth is losing momentum as the US is showing signs of slowing and as the Federal Reserve "is facing a very uncertain time" as it considers curbing emergency stimulus measures put in place when the COVID-19 pandemic was unfolding.

"The big question is do you get a market accident or a policy mistake that shapes the behavioral condition of markets to always buy the dip and we are going to be tested over the next few sessions on this," he said.

The Federal Reserve on Tuesday will begin a two-day policy meeting at which investors expect the central bank to signal when it may start reducing the $140 billion a month it purchases in US Treasury securities and mortgage-backed securities.

Stocks and other so-called risk assets "including crypto" were together taking a hit Monday while assets perceived as relatively safe such as bonds were gaining ground.

"Today, we're getting all the correlations you expected in the old days, and that we haven't gotten for a while," he said. "Higher gold, higher VIX, and significantly lower bond yields, including at the long end, so for once the market is acting according to historical correlation which it hasn't done for a very long time."