NEW YORK -- As cracks start to show in China's capital-intensive growth model, Oaktree Capital Management founder Howard Marks anticipates more opportunities for the firm's mainstay business of investing in heavily discounted distressed debt.

Developer China Evergrande Group's debt crisis is "a moment of transition to what I would call economic reality," with the "ups and downs" seen in developed economies, Marks said, and downturns will mean more nonperforming loans to invest in.

Edited excerpts from the interview follow.

Q: Oaktree has been buying distressed debt in China since 2015. Do you see more attractive opportunities going forward?

A: There's more distress all the time. As an economy grows, more loans become distressed. Plus, in China, I think that the lending decisions were not always based on an assumption of cyclicality.

When the cycle appears, there'll be more distressed debt. Our experience has been positive. So what do you need to be successful? You need a good supply of [nonperforming loans] for sale, you need the skill to analyze them and restructure them, and you need an environment of rule of law, in which contracts are honored and processes go in a predictable fashion.

And so far, that's what we've experienced. The contracts have been dependable. So, no reason not to continue.

Q: Is the ongoing political tension between the U.S. and China affecting your investing?

A: We haven't had any obstruction.

China wants to be a major factor in the world economy, and in the capital markets, they want Shanghai and Beijing to be financial centers. And I think they understand what you have to do to be a financial center. Your laws have to be consistently applied, fairly applied. Your contracts have to be enforced. I think they will continue to do so.

Once in a while you see something like the [for-profit] education or Tencent [crackdowns] or something like that. Since the government can do whatever it wants without resistance, it's more important to be on the same page with the government and to be doing things that the government wants done.

I haven't tried, but if it's possible to figure out which are the things that [Chinese President] Xi [Jinping] is likely to push back against, it would be great if you could figure that out and not do those things. We tried to invest in a way so that we're a partner with what's going on over there, not an enemy.

Q: Wall Street has maintained good relationships with China.

A: I think it's a mutual situation. They have their goals in terms of being a global financial power and we have our goal to have good business over there and those two goals can be consistent.

I think we have good relations over there. I think they understand the importance of having a dynamic capital system, and the rule of law. So, I think that the things that have gotten the headlines have been the exceptions, but most of the business is going on fine.

Q: What is your take on the Evergrande crisis?

A: The Chinese economy has grown very strongly on the back of capital availability and very capital-intensive growth, including construction of unneeded buildings. You can't do that forever.

The Evergrande situation shows what happens when you have a very high rate of growth based on capital availability. Number one, it may be unsustainable. Number two, you make some bad decisions.

At some point they have to transition to an economy that runs on its own power.

Q: People's Bank of China officials have said the Evergrande situation is controllable.

A: Ultimately the Chinese government can do anything it wants to do. It doesn't have to get approval from voters, from Congress, like we do here.

They can solve the Evergrande problem if they want to. For example, they could say, "We are going to buy back all the debt of Evergrande." They could. They won't.

China has risen for 30 years on positive trends. But in developed economies, they don't go straight up, they go up and down. I think that this is a moment when there's enormous pain and crisis. It's a moment of transition to what I would call economic reality. In economic reality, there are ups and downs. I think that China is smart enough to say, "We're not going to rescue all of the Evergrande investors."

Q: Who will and won't be rescued?

A: They'll probably do something about the people who put down deposits on apartments. They'll probably do something about the individuals who bought the debt products, because they don't want the little guy to get hurt.

But will they bail out the Chinese bond holders? I don't know. Will they bail out the non-Chinese bond holders? Probably not, is my guess. Because a bailout is a denial of economic reality. And in the long run, an economy cannot succeed if there's no reality.

That's the turning point, because creative destruction is part of life in an economic system.

Q: In Japan, falling stock and real estate prices in the 1990s and early 2000s drove many companies to pay off debt, contributing to a lasting economic contraction. Could China go down the same path?

A: I think that China still has a high underlying rate of growth, because they don't have that much of a middle class, and they'll still have a lot of growth from the creation of the middle class and the domestic spending consumption by the middle class. So, I think that China can continue to grow at an above average rate. Maybe not the same as in the past.