It’s been a relatively quiet three months for Chinese stocks, at least until last night. After the voluminous drop towards the end of the summer that saw as much as $5 Trillion erased from Chinese Market Capitalization, support came in around mid-September as the numerous stimulus actions from China began to show promise (or hope, which can’t quite be differentiated considering that the ramifications of these stimulus actions haven’t completely shown in the data as of yet). But stock prices started going back up, confidence began to show again, and for all intents and purposes, it was beginning to look like the global economy was back to its bullish ways that have denominated the past six years of price action. The low was set on Shenzhen Class-A shares on September 15th, just a day after another batch of abysmal data drove stock prices lower.

But a continual onslaught of government-designed measures to reinvigorate the economy and the stock market provided enough impetus for investors to jump back into risky assets, Chinese stocks included, even though we had just seen a major bruising in these asset classes. As an example, Shenzhen Class A shares were down by as much as 50% from their June highs. But one of the consequences of ZIRP means that there aren’t many attractive asset classes to invest in, given that rates are continuing near record-lows, and as the Federal Reserve appears to be on the cusp of kicking on a rising-rate cycle that will see interest rates drive higher in the coming years, Fixed Income investments look downright disgusting.

Inflation and higher interest rates are a bond investor’s worst enemy, as they eat away real-return and knock-in principal should rates rise. If you buy a 2% bond today, who in their right mind would pay you full par in 5 years when they can get the same type of bond (maturity, credit quality, etc.) with a 5% coupon? They wouldn’t, so you’d have to take a discount on the bond to get the ‘Yield to Maturity’ close to that 5% marker just to make it attractive in the secondary market. This is just another reason that so many people around-the-world jumped back into stocks so quickly; there is a dearth of other attractive areas to store money. This led to a screaming comeback in many risky asset classes, Chinese small-cap stocks no different.On the chart below, we’re looking at the two very different phases that have engulfed Chinese equities over the past 6 months.