Chinese stocks have gone from being considered 'dead money' to one of the best performers in the last couple of months. It's not entirely surprising given that Chinese stocks topped out late in 2020 and have been trending lower since then. For investors, the next question is whether or not this is the bottom or simply just an oversold bounce.

The major factor in determining this question is whether some of the developments that triggered this move higher are temporary or legitimate. Of course, the biggest question is China's Zero-COVID policy which has handcuffed the country's economy. As of now, the country seems intent on normalizing and focusing on economic growth following a string of intense protests around the country and businesses speaking up about the need to change course.

Not surprisingly, the country is in the grips of a massive coronavirus wave which is exacerbated by not many people having immunity due to strict lockdowns and low rates of vaccinations. There are an estimated 5,000 deaths per day and reports of shortages of medicines and an overwhelmed medical system.

While this is not ideal from multiple perspectives, it is positive from a financial markets perspective as it's an indication that the central leadership and local governments are on the same page when it comes to boosting economic growth.

Another indication of a change in policy is the country backing off on the sharp crackdowns and regulatory pressures specifically on its tech sector. The government seems satisfied with its actions and has clearly indicated that these tech companies remain within the purview of the Chinese government.

As has been noted in the past, it's ironic that the Chinese government spent much of the past decade, building up its own domestic tech sector to compete with Western companies. This goal was accomplished but almost too well as these companies became multinational and were led by charismatic CEOs unafraid to speak their minds and be critical of government decisions.

In the U.S., market forces and shifting public opinion have curbed the power of tech companies. In China, the CCP achieved this goal much more directly. Yet, it's also fair to consider whether it did the job too well given the massive losses between 50% and 80% in many of these companies. The vast bulk are now trading below their March 2020 lows even with very impressive rallies.

Even with all the positive, near-term developments that have made this a fantastic trade, there remains considerable risks in the long-term given the long-term trajectory of the Chinese economy and the potential of escalation between the U.S. and China which could have devastating effects for Chinese stocks listed in U.S. markets.