We’re all supposed to be buying Chinese stocks, apparently.

The bull case goes something like this. Once people stop dying by the hundreds of thousands, domestic demand will recover. The government’s avowed commitment to fostering growth in 2023 means the days of Xi deliberately undermining the economy in pursuit of various social agendas and pet projects are over (if only for now), and if the developed world dodges recession (or if any recessions are mild), external demand may prove more resilient than expected.

Activity data for December as well as an official tally for fourth quarter GDP are due Tuesday. The December data will presumably echo painfully poor PMIs, and the GDP print will reflect a dramatic loss of momentum both from lockdowns and from the lifting of lockdowns. Remember the paradox of Xi’s “COVID zero” reversal: The decision to remove the curbs emptied the streets just like the curbs themselves.

The services sector suffered a drop in activity in December that looked quite a bit like that associated with the Shanghai quarantine.

Tuesday’s activity data and GDP print will almost invariably be dismissed as too stale to matter — it’s all about the future and the future is bright! Just ask the CSI 300, which is up nearly 7% already in 2022.

Foreign money is pouring in at the fastest rate in 20 months, and the inflows continued Monday. The mainland benchmark is now through its 200-day moving average for the first time in more than a year.

From the October lows, the CSI 300 is nearing a bull market, and H shares are obviously up dramatically over the same period.

What could go wrong? Well, a lot actually, but let’s assume everything goes right. Wouldn’t that mean you’d regret not buying Chinese shares? For professionals maybe, but for everyday investors probably not because most people own far more Chinese stocks than they realize. You almost surely own Tencent either directly or tangentially, and if you own a lot of EM shares through popular retail products, you have quite a bit of China exposure. The most popular retail emerging market equity vehicle owes more than 200bps of its YTD gain to just a handful of Chinese stocks, for example.

The real issue, though, is that beginning with Beijing’s 2020 decision to ice Ant’s IPO following Jack Ma’s ill-advised critique of Chinese regulators, and continuing unabated through 2021 and most of 2022, Xi made it abundantly clear that his vision for society comes first. Corporate profits are a secondary concern, and foreign investors can either take it or leave it.

Everyone loves to point to the Hang Seng Tech’s dramatic surge from the October nadir, but I’d gently remind investors that coming back from a near 80% drop is damn near impossible, particularly when the government has given new meaning to the term “managed earnings.” Earnings estimates for the space fell 33% during the crackdown. They haven’t recovered. Xi is extorting those companies, Whitey Bulger-style.

He also presided over a catastrophic period of multiple compression. It was more like multiple destruction. Hong Kong-listed Chinese tech shares traded near 50x on a forward multiple in early 2021. That figure was 17x by October. Xi was Rick James on the couch.

The green arrow in the chart above is your “world-beating” rally. Suffice to say it doesn’t look as impressive in context. In fact, the drawdown chart for the Hang Seng Tech index is indistinguishable from the same chart for a number of alt-coins in the crypto space. Virtually all the value from the highs was decimated. Anyone brave enough to step in can conceivably score outsized gains, but to say it isn’t for the faint of heart would be to materially understate the case.

You might suggest 17x is a much healthier multiple (it’s ~25 now), and I wouldn’t argue with you if this were any other market. The problem is that this is Xi’s market, and he’s wholly unconcerned about what a “fair” multiple is for Chinese tech companies. Worse, he’s also unconcerned about the “E” in the P/E ratio. If the last two years showed us anything, it’s that Xi is inclined to cap profits in Chinese tech.

Beijing is apparently ready to let Didi out of the penalty box. The ride-hailing giant became the poster child for US-China listing tensions in 2021, and the company’s subsequent struggles to pacify Chinese regulators were a case study in what happens when you challenge the Party as a domestic company with troves of data on citizens. After an excruciatingly bumpy ride, Didi won approval to relaunch its app and sign up new users. “It suggests the government is serious about easing up on giants from Alibaba to Tencent,” Bloomberg imagined.

Xi is “serious,” that’s for sure. Serious about not letting capitalism run wild again. The government now has “golden shares” in Alibaba to Tencent, which means… well, it depends on who you ask. If you ask Banny Lam, “the government stake could potentially help them to get greenlights to do businesses in new areas and lower the risks of further clampdown by the regulators.”

That’s probably true, but let’s face it: The government stakes are just another tool for Xi to exercise his influence, and this way he might not have to be so openly draconian about it. Beijing is going to steer these companies both from the outside and from the inside.

“While official messages in China are now more business-friendly, asset booms are not compatible with reducing income inequality under ‘Common Prosperity,'” Rabobank said Monday. “Beijing is now to control which firms can and can’t list on the stock exchange to direct capital to strategic sectors (to what end?) and there is no need for regulatory crackdowns on tech firms if you buy golden shares to control them.”

The bottom line is that Western media and Western investors are never going to learn, where “learn” means accepting the reality of Xi who, at this point, is as much an ideology as he is a person. When you put money into Chinese equities, you’re effectively suggesting you have a good read on Xi. If not, you’re just gambling.