China's stocks may drop as much as 10 percent over the next six months as the government curbs money supply growth to reduce liquidity and rein in property speculation, according to China International Capital Corp. “Stocks could fall 5 to 10 percent in the next three to six months as money supply growth reverts to the norm,” Hao Hong, global equity strategist for CICC in Beijing, said in a report.

China's M1 monthly money supply, which includes money in circulation and demand deposits, rose 32 percent in December from the previous year. While the level fell 6.6 percent from the previous month, the first time in 11 months, it's still “unsustainably high” compared with the average of 20 percent growth during previous peaks of China's monetary cycles, he said.

Hong recommends consumer and health-care companies, saying that they have “pricing power” and can pass off higher prices to consumers as inflation accelerates. The benchmark Shanghai Composite Index has fallen 3.8 percent this year on concern the government will tighten monetary policy to curb record loan growth and prevent bubbles in the nation's property and stock markets. Chinese property prices rose 7.8 percent in December, the fastest pace in 18 months, adding urgency to government efforts to rein in speculation.

China's central bank last week unexpectedly raised the proportion of deposits that banks must set aside. This week, it guided its benchmark one-year bill yield to the highest level in 14 months. The Shanghai index, whose trading is dominated by retail investors, rallied 80 percent in 2009.

Hong's report was his first for CICC, the top-ranked brokerage for China research in the annual survey by Asiamoney magazine. He left New York-based Brean Murray Carret & Co. in September.