China may cut growth in new loans by half in the last six months of this year to deflate a bubble in the world's second-best performing stock market, according to former Morgan Stanley chief Asian economist Andy Xie.

The Shanghai Composite Index has surged 87% in 2009 as $1.1 trillion of bank loans and government spending spur an economic recovery. The index plunged the most in eight months on 29 July on speculation the government will curb inflows into a market trading at its most expensive since January 2008.

"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 independent economist Xie, who correctly predicted in April 2007 that China's equities would tumble. "I think the property and stock markets will come under pressure probably around October time," he said.

China's central bank said on 29 July it will use market tools to control lending growth and affirmed a "moderately loose" monetary policy to support the nation's economic recovery.

A People's Bank of China official said the regulator doesn't comment on information it didn't distribute. Fu Weiyi, a Beijing-based press officer at the China Banking Regulatory Commission, couldn't be reached for comment at his office.

It's "undeniable" that a portion of this year's new lending entered the nation's stock and property markets, Cheng Siwei, former vice chairman of the standing committee of the National People's Congress, China's parliament, said in June.

An estimated 1.16 trillion yuan of loans were invested in the stock market in the first five months of this year, China Business News reported on 29 June, citing Wei Jianing, a deputy director at the Development and Research Centre under the state council, China's cabinet.The Shanghai Composite added 2.7% to 3,412.06 at the close, capping a 15% monthly gain, its biggest since August 2007. This year's rally follows a 65% plunge in 2008. The index, which doubled in 2006 and 2007, remains about 2,700 points below its October 2007 high.

"The Chinese stock market is always like that," Xie said. "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."

Bloomberg