Chinese equities were off on the wrong foot in 2025.

Mainland shares dropped nearly 3% Thursday, a decidedly inauspicious start to the new year. In fact, it was the worst first-day session since 2016, when global markets were still reeling from the PBoC’s fraught efforts to orchestrate a weaker yuan.

Recall that the CSI 300 managed to dodge an unprecedented fourth annual loss in 2024, but the benchmark’s 15% advance was due entirely to a state-engineered buying frenzy in and around Golden Week. That euphoria faded quickly and local shares moved sideways for the remainder of the year.

Between Thursday’s selloff and a decidedly lackluster final 2024 session, the mainland benchmark’s down almost 5% in two trading days.

As the figure above shows, the index is now below the 60-day moving average, which Bloomberg suggested might’ve prompted selling from trend-following strats.

Thursday’s color from analysts was as predictable as it was insipid. Summarized: Sentiment’s still fragile, and that’s a bad sign given the incessant drumbeat of stimulus pledges from the Party.

But here’s the thing: That stimulus drumbeat’s too nonspecific. After more than a decade of watching China strategists at big Western banks fall for the same old bullsh-t, I’m resigned to the futility of expecting “better” from people whose job it (ostensibly) is to call a spade a spade. But the reality is that the Chinese government has a tendency to lead people on. Sometimes, that proclivity’s indicative of “3D chess,” decades of duplicitous trade policy being the quintessential example. Sometimes, though, leading people on just means you’re out of ideas, and that’s where the Party is now in the context of flagging domestic demand.

Some observers blamed a miss on the Caixin factory survey for Thursday’s sour sentiment and accompanying stock swoon. Maybe that was part of it, but you’re going to have a hard time convincing this observer that a 50.5 print on a second-tier PMI (versus an expected 51.5) was enough to tip the buy/sell scales towards a 3% pullback.

Note that 10-year yields in China dropped below 1.63% on Thursday. Have a(nother) look at this:

What does that look like to you? To me, it looks like a deflation panic. I mean, it also looks like leveraged players taking advantage of abundant, cheap liquidity to pile into a momentum-driven local bond bubble, but that bubble has a fundamental underpinning: The looming threat of deflation.

Of course, there’s also the looming threat of tariffs, which is to say the “threat” of Donald Trump’s inauguration in three weeks, an event Xi Jinping was cordially invited to witness in person.

At the end of the day, though, I maintain (and will forever maintain) that for all the excuses, the simplest explanation is the best one: The Chinese government’s a communist dictatorship, and Xi’s in the process of reversing a long-term trend towards a (much) softer version of a governance model which, in its strictest form, failed spectacularly in Eastern Europe.

With that in mind, I’ll leave you with an excerpt from the November 23 Weekly which, I think, goes a long way towards explaining where things went wrong and why China can’t seem to get out of its own way these days. To wit:

In the years before Xi Jinping decided to turn a one-party system into one-man rule, China had a model with a loose, semi-plausible, claim on legitimacy. Yes, the Party exhibited a lot of the attributes we associate with totalitarianism, but it was transitional in nature. The country was marking a glacial transition to what was eventually going to be bureaucratic, managed capitalism under the watchful eye of a communist elite who’d continue to derive legitimacy from perpetual quality-of-life improvements for the Chinese people. It worked like an ironic charm for nearly three decades: Communist overlords and their platoons of subordinates leveraged capitalism to retain the consent of the politically repressed. In theory, that could’ve been replicated without the communists, which is to say any other sort of tyranny could be paired with a market economy to create a metastable system where the populace was too busy enjoying the fruits of capitalism to worry about civil liberties. China had a “good” thing going. Xi f–ked it up. From here on out, no one’s going to look past the contradiction inherent in the exploitation of laissez-faire capitalism to prop up overbearing political regimes.