by Michael Clark

I have been speculating that China will join the currency war again, and in an even bigger way, the currency war that Japan is currently leading and threatening to win in a walk unless China gets serious about ‘getting competitive.'

China lowered interest rates last week; and this spurred heavy buying in Chinese stocks. Why such heavy buying in Chinese stocks, when the economy is weakening? One thought is that rich Chinese are eager to unload their Yuan holdings before the Great Devaluation begins. One way to do this is to plunge ‘money' in stocks before the devaluation. Devaluation WILL drive stocks higher. See the US during the QE Half-Decade as an example of this, and Japan after every stage of QE in their past decade of debt-monetization.

Interestingly, not all Chinese stocks are rising wildly. In fact, the Shanghai Index (SSEC) is roaring; and the Hang Seng Hong Kong Index (HSI) is not, is whimpering in a languid consolidation move. The Hang Seng is the international index, allowing foreign investors to trade in Chinese stocks; the SSEC is (or at least has been) open to only Chinese nationals for investment. In November, China did open a small window to the Shanghai market for foreign investors ($2 billion in a $3 trillion market), but this does not seem to explain the divergence. China, as an economy, faces a lot of problems; and seems to be heading into another leg of recession due to continuing debt problems and housing bubble collapse. The Chinese economy is growing at its slowest rate since 2009. So, why is Shanghai soaring?

Let's look at a few charts.

(click to enlarge)

(click to enlarge)

These first two charts show the different indexes and markets in China, the SSEC (Shanghai) roaring upward; the HSI (Hong Kong, Hang Seng) in consolidation.

CYB is the Chinese Yuan ETF from Wisdom Tree. It has made a long run up, over many years; but it is trying to top. Is it topping?

(click to enlarge)