China’s stock market is surging even as the broader economy struggles with deflation, a property crisis, and the weight of U.S. tariffs — a sharp disconnect that has analysts warning of unsustainable exuberance.
In just one month, Chinese onshore equities have added nearly $1 trillion in market value. The Shanghai Composite Index has climbed to a decade-high, while the CSI 300 Index has risen more than 20% from this year’s low, entering technical bull market territory. Yet the rally stands in stark contrast to economic indicators, where consumption is weak, home prices continue to slide, and inflation remains perilously close to zero.
Market strategists say the run-up has been fueled by cash-rich investors seeking returns in the absence of better alternatives. Ample liquidity has flowed into equities, providing steady upward momentum. Still, global institutions are cautioning against complacency. Nomura Holdings has flagged signs of “irrational exuberance,” while TS Lombard described the current environment as a face-off between “market bulls and macro bears.”
“Markets might be expecting, either correctly or incorrectly, that macroeconomic fundamentals will improve,” said Homin Lee, senior macro strategist at Lombard Odier Ltd. in Singapore. “But a bull market will not be sustainable if inflation remains close to 0% and corporate pricing power faces severe headwinds from weak domestic demand.”
The deflationary drag remains severe. Consumer prices were flat in July, producer prices have declined for 34 consecutive months, and the GDP deflator is still negative. Corporate earnings have suffered, with 12-month forward profit estimates for CSI 300 firms slipping 2.5% from their highs earlier this year. Companies like JD.com and Geely Automobile have been squeezed by intense price competition, highlighting how weak demand is undermining profitability.
Investors are now betting on further government support, but Beijing has been reluctant to roll out the kind of massive stimulus seen in 2008 or 2015. Instead, policymakers are leaning on targeted measures to address overcapacity and price wars. Ironically, the equity rally itself may complicate the policy response: pro-growth stimulus could risk inflating a stock bubble even further, analysts say.
The surge is drawing comparisons to the dramatic 2015 boom-and-bust cycle, when a wave of leveraged trading sent markets soaring before regulators cracked down, triggering a spectacular crash. While today’s gains are less aggressive, margin debt has climbed back to 2.1 trillion yuan ($292 billion), not far below the 2015 peak of 2.3 trillion yuan.
“The abundant liquidity in the market and the gradual wake-up of animal spirits remind us of the crazy times a decade ago,” said Hao Hong, chief investment officer at Lotus Asset Management Ltd. “Of course, it is still early days.”
There are reasons for optimism. Unlike in 2015, China now has larger deposit pools, more mature technology firms, and more direct market-support policies. The recent broadening of the rally to include more sectors could also signal more sustainable momentum. But others remain cautious, pointing out that deflation, slowing demand, and fierce competition in many industries leave the macro picture fragile.
“China’s bull market is more of a mystery box than a conventional growth story,” said Hebe Chen, analyst at Vantage Markets in Melbourne. “The risk is that once sentiment fades, investors would flee in no time.”
