The Playbook: Understanding China’s Regulatory Shock Therapy

When an industry becomes too powerful or misaligned, Beijing hits pause—hard. Then it rebuilds.

What “Uninvestable” Really Means in Chinese Markets

Warren Buffett once said, “If I need a second opinion, I’ll look in the mirror.” It’s a reminder that investing isn’t a democracy. You don’t win by majority vote.

While I trust my own research, I highly value people who challenge my perspective, force me to rethink, and stress-test my assumptions. I generally only care about information that has the potential to change my current opinion —not reinforce what I already believe.

Recently, I had a call with a retired fund manager I got to know through my Substack. He’s become one of my key sparring partners for new ideas. I love discussing with him because he’s smart, not politically correct, and—most importantly—often holds a very different view from mine.

This time, I mentioned two Chinese companies I’m currently analyzing. In both cases, he didn’t even let me finish. Just said: “Beijing hates these industries. It’s dead money. Believe me.”

He generally has a much more negative view on China than I do, which I genuinely appreciate. But this time, it felt overdone. And for me, that was valuable signal. If someone smart won’t even hear the pitch, just hears the industry and shuts it down, that’s exactly where it gets interesting.

Because whether it’s euphoria, despair, or outright refusal to engage, that’s where mispricings hide. Always.

Same Policy, Different Reaction

To give you some context, I was looking at two companies in sectors that have recently been hit hard by Chinese policy. So why were our reactions so different? He instantly dismissed them and refused to take a closer look—while for me, that actually triggered real interest.

It all comes down to perspective.

The Outside Perspective: The Demolition

To an external observer, China’s regulatory crackdowns look like arbitrary acts of destruction. The intervention is usually sudden and brutal. With little warning, policies land that wipe out valuations, declare entire business models no longer viable and trigger headlines announcing the death of a sector or industry. The impact is immediate and severe.

For people used to governments that move slowly, where policy comes through soft signals, drawn-out consultation, and careful transition periods, this feels extreme. Even hostile.

It paints the picture of a state dismantling its own economy. So the logic follows: if it looks like a wrecking ball and swings like a wrecking ball, the goal must be demolition.

The Inside Perspective: "The Government Is Not Stupid"

I’ve lived in China long enough to have internalized parts of how things work here. Still, I learn more every day—and there’s much more to learn. Just how different the local perspective is from the outside view became clear to me again during a recent call with the management and IR team of one of the companies I mentioned earlier.

They were very direct. They told me the entire industry is in a regulatory winter. The pain is real. Weaker players are being shaken out. But one executive said something remarkable: “It’s painful, but the government is not stupid.”

He didn’t say that out of party loyalty or some need to defend official policy. He meant it seriously. He understood why the government acted the way it did. Parts of the industry had developed in unhealthy ways—practices that didn’t serve any broader public interest. So the government stepped in.

Because in China, the purpose of these interventions is rarely to destroy a sector—unless we’re talking about the mafia or drugs, which did get wiped out in Beijing and other places. The point is realignment. When a sector—be it education, tech, or real estate—starts growing in ways that collide with bigger national goals, whether that’s social equity, financial stability, or demographic priorities, the state intervenes. They don’t spend two years consulting industry stakeholders and releasing white papers—they move. Fast. Publicly. Often with overwhelming force.

The purpose is twofold: to instantly terminate undesirable practices and to send an unambiguous signal to every market participant about the new inviolable rules of the game. It is a short, sharp shock designed to clear the field.

And when the executive said, “The government is not stupid,” this is exactly what he meant. Beijing knows that China very much needs the sector this company operates in. They know how important it will be going forward. Which is why, now that the initial impact has landed, they’re already starting to fine-tune the policies—quietly adjusting where they went too far.

Pattern Recognition

What I’ve described here isn’t new. Variations of this pattern have played out many times before.

I’m not going to explain why the Chinese government acts the way it does. There may be others who can explain that better. That’s not the point.

What matters is the structure—the shape these interventions tend to take. Once you’ve seen a few of them, it starts to look less like chaos and more like a recurring pattern.

It usually follows a familiar outline—a kind of three-act play. And no, understanding the exact motivations behind every policy move isn’t the point. The point is recognizing what’s happening, where we are in the cycle, and what tends to follow.

It’s pattern recognition. And once you’ve seen it, it’s hard to unsee. Master that pattern—and you’ll find that China’s best opportunities often hide not in today’s darlings, but in yesterday’s disasters.