China's plan to cut lending threatens stock market growth

The Chinese central government is putting brakes on almost all bank lending to both individuals and commercial enterprises. The freeze will last at least until the end of this year. According to The Wall Street Journal "a China Banking Regulatory Commission official here confirmed that local and Chinese subsidiaries of foreign banks have been asked to ensure that loans at the end of the year don't exceed the total outstanding on Oct. 31."

While the move may help bring down inflation, it could also cause a nosedive in China's consumer spending and stock markets. It is broadly assumed that much of the money going into stocks traded on the Shanghai exchange comes from borrowed funds. Since the index for those shares has more than doubled, the borrowing seemed wise, at least for now.

Although much of the goods and services production in China goes overseas in the form of exports, the country's new middle class has also created a vast pool of consumers.

The government is taking a dangerous gamble, but it may be necessary. An overheated economy could lead to hyper-inflation as more money chases fewer products, homes and company stock shares. If the stop is too abrupt, however, the Chinese economy could fall over itself and drop into a recession. Cutting off lending completely is too large a risk to China's GDP growth.

Douglas A. McIntyre is an editor at 247wallst.com.