Andy Hoffman reports that The Peoples’ Bank of China is “clamping down on a massive lending spree amid fears the world’s third largest economy is overheating.”

We opined in China Growth Booms, But Is It About to Collapse? that China has blown a huge bubble with the trillion or so US dollars it pumped into its economy.  With no more lending, what will happen to the bubble that has been created in China?

The response in the marketplace thus far has been for investors to pull some capital out of stocks in the last several days, as evidenced by a near 1000 point, or 4.5%, decline in the value of Hong Kong’s Hang Seng Index, which is closely tied to China.

Where will the money from Chinese stock markets shift in the event this sell-off turns into a panic? One guess is the US Dollar, which seems to be poised to break through up-side resistance levels. While it’s amusing that the US Dollar may become a safe haven in the event of panic in global stock markets, the recent Dubai collapse supports this theory for the time being. There is so much confusion in the world about what is actually going on with the global economy, that it seems most investors, in the event of an emergency, will default to the US Dollar, the world’s reserve currency.

If recent history is any guide, this means that any major collapse or sell-off outside of the United States, will lead money into the US Dollar for safety, which will likely result in stocks in the US dropping, along with gold and commodities. The dollar is not dead – yet.

However, Larry Edelson, of Uncommon Wisdom Daily, is not 100% convinced that the BOC’s lending pullback will lead to a market collapse:

I do not believe, as many bears out there on natural resources and bears on the Chinese market believe, that this is going to precipitate a major setback in Chinese markets, in the Chinese economy, or derail anything major that’s happening as far as recovery goes. We’ve seen this many times before in China, and their economy is just too strong and too healthy and has too many things going right for it to see the kind of setback that a lot of bears are calling for.

Watch Larry Edelson’s assessment regarding the recent developments in China in his video blog this morning: