Nov. 5 (Bloomberg) -- China should withdraw its monetary stimulus to correct “imbalances” in the economy and avoid bad loans from surging among the nation’s banks, said Aberdeen Asset Management Co., which manages $40 billion in Asian equities.

“The government is stimulating the economy through the banks,” Nicholas Yeo, head of Hong Kong and China equities, said in an interview at Bloomberg headquarters in New York. “When the government exits its stimulus program, you may see more nonperforming loans. It may take three to five years. I think they should withdraw stimulus but they won’t because they need to keep the economy going.”

The World Bank said yesterday China’s policy makers must avert stock and property market bubbles after lending swelled to a record $1.27 trillion this year. China will need to do more to rebalance the economy toward consumption and services and away from investment and industry, Beijing-based World Bank senior economist Louis Kuijs said.

The Shanghai Composite Index has surged 72 percent this year after Chinese authorities enacted a $586 billion stimulus plan, lowered banks’ cash reserve requirements and reduced the one-year lending rate to a five-year low. China’s new lending tripled to 7.37 trillion yuan in the first half from a year earlier as the government eased restrictions to help boost the economy, which rebounded to grow 8.9 percent last quarter.

‘Strong Underweight’

China plans to tighten rules on personal loans to prevent them from being used for speculation, the China Banking Regulatory Commission said on Oct. 28. Personal consumer loans, many of which are mortgages, surged 151 percent from a year earlier to 650.8 billion yuan in the first half, the regulator said in a statement.

Aberdeen has a “strong underweight” in mainland stocks, Hong-Kong based Yeo said. “I’m uncomfortable with state-owned enterprises like the banks,” he said.

Yeo recommends investors get “exposure” to China by buying Hong Kong companies such as property developers Sun Hung Kai Properties Ltd. and Hang Lung Properties Ltd., which generate earnings from the mainland.

“China is an exciting story and investors should have some exposure but that doesn’t mean by buying the pure Chinese companies,” Yeo said. “We like Sun Hung Kai and Hang Lung because they are involved in commercial real estate and shopping malls and are less likely to be affected by the clampdown in residential lending.”

Indian stocks are a better investment than China equities, Yeo said.

“We have a big overweight in India and a big underweight in China,” he said. “India has a rising middle class that will help drive domestic demand.”

To contact the reporters on this story: Allen Wan in New York at awan3@bloomberg.net; Tian Huang in New York at thuang57@bloomberg.net.

Last Updated: November 4, 2009 17:27 EST