Tags: andy | xie | china | bubble

Andy Xie: China Will Slash Loans to Deflate Bubble

By Marc Davis   |   Wednesday, 05 Aug 2009 12:56 PM

Too much of a good thing may not be good for the economy — the Chinese economy, that is.

Former Morgan Stanley Chief Asia Economist Andy Xie says China may cut new loan growth by half in an effort to bust the stock market bubble on the world's second best-performing stock market, according to Bloomberg News.

Bank loans and the Chinese government's stimulus money have boosted the Shanghai Compositie Index by an astounding 85 percent this year through Aug. 4.

When the news hit that the government would put a cap on loans and cash infusions, the index fell precipitously.

"The government is worried that this bubble is becoming too big so they're going to cut credit growth by probably half in the second half," said Xie.

"It goes up a lot and then it goes down a lot. It never is in a steady stage. I'm afraid this time it's very similar," Xie said, commenting on index.

Despite the market downturn, Chinese equities may just be taking a breather before the next lift off, say some.

Chinese officials have ordered banks to make sure that their slew of new loans is directed to real businesses rather than stock and real estate speculation.

China’s new bank loans more than doubled in the first half of the year from the same period of 2008, reaching 7.37 trillion yuan.

The lending spree came as the government implemented a $587 billion stimulus package to keep the economy out of recession.

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