By BloggingStocks

For the first time in eleven months, China's M1 money supply has fallen 6.6% from the previous month. But with China's aggressive stimulus program, China's money supply grew by 32% in December from the previous year.

China is worried that all of the excess money sloshing around in its economy will cause an asset bubble, mainly in stocks and real estate. China's property values rose 7.8% in December, the fastest rate in 18 months. The Shanghai Composite index rose almost 80% in 2009.

China's central bank has raised the proportion of deposits that banks must hold. The 1-year T-bill rate was raised to the highest level in 14 months.

Hao Hong of CICC foresees a drop in the the Chinese stock market, BusinessWeek reports. He said that "Stocks could fall 5 to 10 percent in the next three to six months as money supply growth reverts to the norm." Hong also stated that "China's stock market ebbs and flows very closely with money supply growth."

So far this year, the Shanghai Composite index has fallen 3.8%. Whether China's central bank is serious about curbing its money supply for an extended period remains to be seen. For now, it may be wise to stand aside until the dust clears.