China hikes interest rates, raises reserve requirements

China is currently taking a sledgehammer to its economy in an attempt to slowdown growth. On Friday, China officials announced it was hiking short-term rates, increasing the required reserves banks maintain on loans and increasing the band on its currency to let it further appreciate. All powerful tools to halt money supply growth.

These steps follow news reports this week that one of China's more respected entrepreneurs said the Chinese stock market is a bubble. We blogged a few weeks back that Chinese retail investors opened more than one million stock trading accounts in one week and over 10 million the last four months -- greater than the previous four years combined.

Currency appreciation during the short-term always adds more fuel to the fire. As Chinese investors expect the yuan to appreciate, they will convert their massive hoard of US dollars to yuan and then most likely look for additional profits in the stock market. This always ends ugly when the central back finally succeeds at sucking enough money out of the economy and then the market will have a serious correction.

I'd stay away from Chinese stocks. China hosts the Olympics in 2008 and does not want a bubble economy when the world shows up. Stick with the mature economies for now.