Why Betting on Chinese Stocks is Like Putting Your Savings in a Lottery—But Rigged

 

China's stock market is a black box where transparency is a myth—investors risk losing billions because the game is rigged, and Beijing controls the rules.

Money talks, and in China, it seems to also whisper cryptic warnings to investors. Despite recent moves by Beijing to reinvigorate the stock market, the reality for investors remains as uncertain as the infamous shifting sands of the Gobi Desert.

On the surface, it looks like Chinese stocks are on an upswing. Stimulus measures announced by Beijing have sent major indices, like the CSI 300, soaring. Reports from Goldman Sachs predict an additional 15-20% surge, bolstered by policies such as liquidity injections, interest rate cuts, and easing mortgage rates. The MSCI China Index alone has risen more than 34% so far this year, outperforming many global benchmarks. Goldman claims this optimism is partly due to undervalued stocks—valuations that remain below a five-year mean—giving them plenty of room to climb if Beijing stays committed to stimulus efforts. In addition, fiscal easing and a reduction in equity positioning risks are expected to create fertile ground for growth.

But behind these alluring figures, there's a glaring issue: the unrelenting undercurrent of structural problems, ones that China’s government cannot easily sweep under the rug with a few policy gestures. For all the optimistic chatter, it would be naive to ignore the elephant in the room—poor corporate governance, a high proportion of state-owned enterprises, and the government’s habit of blindsiding investors with unexpected policy shifts have been the Achilles' heel of Chinese investments for years. This notorious unpredictability has driven many foreign investors to retreat from the market, fearing they could be trapped by sudden regulatory crackdowns. In January alone, global funds sold a staggering $2 billion worth of Chinese equities, marking the sixth consecutive month of net selling by foreign investors. Since the market peak in 2021, over $6 trillion in value has been wiped out. No amount of government stimulus can fix these deep-seated issues that have steadily eroded trust in China's markets.

There is an old Chinese proverb that states, "A fall into a ditch makes you wiser." Yet, the Chinese stock market seems to ignore the lessons of its own history. For example, the property market collapse—once a bulwark of the country’s economic power—now stands as a colossal reminder of just how precarious the nation’s economic foundations have become. With property values plummeting, household wealth has taken a hit, driving down consumer sentiment and spending, two pillars essential for sustainable growth. It’s this cocktail of declining property value, high leverage, and deflation that has left the average Chinese consumer clutching at straws. A nation's economic strength rests on the willingness of its people to invest, consume, and save, and when that willingness erodes, no fiscal package can rebuild it overnight.

Another adage comes to mind: “Once bitten, twice shy.” Many foreign investors have grown wary of Chinese stocks not merely because of economic woes but also because of Beijing's unpredictable policy environment. Back in 2021, Beijing blindsided education and tech sectors, sending shockwaves through international markets and delivering a cautionary tale of how state intervention can dismantle billions in shareholder value overnight. That crackdown is still fresh in the minds of investors, who now approach Chinese equities with the wariness of someone walking through a minefield. When your investment portfolio is exposed to such unexpected risks, there's little appeal to long-term holding—speculators may rush in for short-term gains, but steady, rational investors are increasingly likely to keep their distance.

It's telling that, even amidst the fervor of China's ongoing market rally, Société Générale and Goldman Sachs have adopted what can only be called cautious optimism. They see short-term gains, but no one is confident enough to declare a structural bull market for Chinese equities. Beijing is expected to announce another fiscal stimulus package worth up to 3 trillion yuan ($427 billion), aimed at pushing GDP growth to around 5% next year. However, experts argue that even these sweeping measures may not be enough to reverse the tide. The bleak outlook persists, partly due to the deteriorating real estate sector, which represents the bulk of household wealth in China. The ability of Beijing to lift its economy depends heavily on regaining trust in the real estate market—a task that seems Sisyphean given the ongoing structural issues in the property sector.

Some investors are still optimistic that policy changes could bring about positive shifts. But it’s worth remembering: in China, the line between public and private enterprises is often blurred, with state-owned firms controlling large swathes of the economy. This duality often limits the flexibility of privately-owned companies and creates inefficiencies that prevent them from capitalizing fully on market opportunities. Moreover, corporate governance continues to suffer under a lack of transparency, leaving shareholders with little recourse in times of corporate mismanagement.

The structural problems facing China's stock market—poor corporate governance, state dominance, and policy unpredictability—make it clear why seasoned investors shy away. A market buoyed by stimulus may seem attractive in the short run, but it's a risky gamble for anyone who values transparency, predictability, and sound governance. You don’t bet on a horse that runs wild just because it occasionally sprints ahead of the pack.

The Chinese government might keep promising recovery with one stimulus after another, but these quick fixes often resemble hastily patched roofs—sure, they stop the rain for a while, but they don’t change the fact that the entire structure is crumbling. While day traders might rejoice in riding these volatile waves, for prudent investors seeking a stable environment, Chinese stocks remain anything but a "good idea." They’re more like a dangerous temptation, one best avoided unless you’re prepared for the roulette wheel of policy shifts and economic uncertainty.

To paraphrase another wise saying: "You can put lipstick on a pig, but it's still a pig." Similarly, Beijing’s stock market might see the occasional pop of rouge thanks to fiscal injections and promises of reform, but beneath the surface, the rot remains. As the old folk wisdom reminds us, "He who rides a tiger is afraid to dismount." China's leadership may not want to dismount the tiger of state control and aggressive intervention, but the reality is that it leaves anyone investing in its stock market permanently on edge.