Chinese equities staged a rousing rally on Thursday attributed rather generically to “bottom-fishing.”

As the book closes on yet another disappointing year for Chinese shares, some market participants will invariably be tempted to “bargain” hunt, an endeavor which is more or less logistically viable depending on your level of access to Mainland markets. Most investors are confined to a handful of ETFs, ADRs and Hong Kong shares.

However you’re situated in that regard, it’s important to remember that Chinese shares can’t be assessed by way of the same metrics, measures and mental constructs we employ to evaluate other markets. Fundamentals are irrelevant. I’ve been over this a hundred times if I’ve been over it once. And I’ve damn sure been over it once. The only “fundamentals” that matter are those associated with Party machinations, and because Party deliberations are opaque, there’s no way to assess the fundamentals in China.

The economic fundamentals might’ve been sound (or maybe not, I don’t actually recall) in China’s then $100 billion education technology sector in 2021, but that was irrelevant when, overnight, the Party made it illegal for companies teaching school curricula to make profits. That’s but one example. I could offer at least half a dozen.

There’s no escaping that embedded feature of Chinese markets. Your investment can be unilaterally vaporized overnight, by decree, if it pleases the emperor. That’s not an exaggeration. And if you stick around long enough in Chinese shares, you’ll learn that lesson the hard way.

For what it’s worth (so, nothing), Thursday’s rally was among the best sessions of the year for the beleaguered CSI 300.

It’s misleading, I think, when mainstream financial media outlets quote Mainland banks, brokerages, investment houses and so on for wider audiences outside of China. If you have to invest in Mainland equities, of course you’re going to rationalize it as best you can. But those rationalizations aren’t applicable to investors who aren’t compelled by country of residence and/or professional obligation to gamble on the vagaries of an authoritarian’s utopian delusions.

I’ll give you an example. On Thursday, a fund manager in Beijing told Bloomberg that (and I’m paraphrasing) a rally was in the making, and that Thursday’s gains were evidence that investors shouldn’t be worried about the myriad pitfalls of a market on the brink of a third annual decline, but rather should be proactively allocating to Mainland shares that’ve derated too much.

That may be sage advice for investors who are going to buy Chinese shares anyway, but it’s dangerous bullshit for everybody else. There’s no telling what Xi’s going to do next. Late last week, he appeared to deliberately torpedo Tencent by issuing a new set of online gaming curbs into a thin pre-holiday market ahead of a four-day weekend in Hong Kong. The inherent capriciousness (or gross ineptitude, whichever it was) would’ve been alarming if it weren’t so funny. Tencent plunged the most since the financial crisis. Less than 72 hours later, Beijing turned around and approved more than 100 new online games in what certainly looked like a complete about-face aimed at reversing the damage.

Anyone who wittingly subjects themselves to that hapless charade deserves to lose their money into the black hole of autocratic delirium. I can’t count the number of times I’ve considered “bottom fishing” in Chinese equities since mid-2021. Whenever I do, I remind myself that even if I’m “right,” I won’t actually be right. All I’ll be is lucky. Lucky that the government didn’t target whatever it is I might decide to buy.

Amusingly, some of the worst shares you could’ve bought in China over the past year were supposed “common prosperity” winners. In an accidentally riotous piece published earlier this week, Bloomberg noted that a trio of such shares lost nearly three quarters of their value in 2023 despite being “perceived as havens amid the Chinese government’s regulatory crackdowns” given their alignment “with Xi’s policy priorities.”

Maybe Chinese shares will be big winners in 2024. Hell, it can’t possibly get much worse. But do note: A lot hangs on whether the Party gets it right next year when it comes to turning the economy around.

The problem, as we’ve seen time and again over the last three years, is that Xi’s definition of “right” is often incongruous with investors’ definition. That ravine might be navigable if it were possible to determine what the Party’s position actually is on key domestic economic issues, but because Xi’s “Thought” as it relates to the specifics of “common prosperity” implementation seems to evolve weekly, it’s impossible for investors to commit large amounts of capital with confidence. Throw in the fact that there’s no rule of law on the Mainland, and it’s a lost cause.

And that’s to say nothing of Taiwan. If Xi decides to commandeer the island by force at any point, and the US ends up in a direct military conflict with the PLA, it’s not entirely out of the question that you’ll be forced to divest. And the price you’ll get may not be great.

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