Red Blood Cells

China's leaders have had more difficult problems over the years than wobbly stock markets.

Deng Xiaoping escaped more assassination attempts than there are courses in a formal Chinese banquet.

Deng, pulled his country from North Korean-style despotism to comfortable middle class suburbia by sprinkling a little free market dust around.

While Deng was being shot at, Milton Friedman (liberal economist du jour) whose number of assassination attempts surprisingly clock in at zero (!) often acclaimed free markets as being fundamental to an individual's freedom - something which is lost on those of us who grew up in a post cold war generation.

A generation after the cold war ended, Chinese stock markets which are fundamentally democratic in nature are squaring off against the most powerful autocrat on the planet - Xi Jinping.

Part of the issue is that Chinese stocks are mostly walled off from the outside world, and owned by Chinese middle classes. Serious losses impact ordinary Chinese people.

Paternalistic governments want to avoid their people from harming themselves and therefore will try to intervene for the wider good.

Benign coercion is genuinely hard in markets which are controlled by the masses.

This is what we are seeing playing out before our eyes.

Let's put this all in context.

The China A25 Large Cap ETF has a history of being volatile.

So far the current brouhaha doesn't register in comparison with past 'assassination' attempts.

You know, someone dismantling the axle of your car in order to send you hurtling down a cliff face is easier to brush off than having to face down a machine gun militia.

In any case how could you deal with such vicious attacks on your Chinese holdings?

We know the FXI exhibits monumental daily mean reversion and it turns out thinking analogously to what we did with Simplest Momentum is profitable.

Simplest Mean Reversion goes like this.

If the previous daily return is negative go long and vice versa.

Code for the Lazy Backtesting IDE is here.

The A25's buy and hold Sharpe jumps from 0.2 to 1.2 with Simplest Mean Reversion.

In fact, Martin Stisen and I have looked at a bunch of other mean reversion strategies which are even more profitable.

Super grateful to have diligent readers with which to bounce ideas off of.