Cover Story: China’s Stock Market Roars Back to Life — But Can It Outrun Economic Gravity?

Chinese stocks have surged to their highest levels in nearly a decade, with the total market capitalization surpassing 100 trillion yuan ($13.9 trillion) for the first time. This has sparked debate about whether the rally signifies the start of a sustainable “slow bull” market or if it is merely speculative exuberance out of step with China’s challenging economic environment. The current euphoria is reminiscent of previous retail-driven booms, as retail interest and record trading volumes have fueled the benchmark Shanghai Composite Index’s rapid rise from about 3,000 points on June 23 to 3,745.94 on August 18, a level not seen in ten years. On this day, almost 4,000 stocks rallied and turnover reached a record 2.81 trillion yuan [para. 1][para. 2][para. 3][para. 4].

Supporters of the rally emphasize strong policy measures and greater institutional participation—spanning insurers to private equity—as evidence that this market may prove more durable, with household savings at record highs (162 trillion yuan by June’s end) and a growing willingness to invest in equities as returns on traditional savings wane. Data show non-bank deposits grew by 1.4 trillion yuan in July, much earmarked for equities and related products [para. 5][para. 6][para. 7][para. 8][para. 9]. However, market veterans caution that inflows remain modest compared to previous booms, while macroeconomic indicators are troubling: China’s consumer price index was flat in July, new credit growth turned negative for the first time in 20 years, and only a quarter of 1,600 A-share companies predicted profit growth in interim earnings forecasts [para. 10][para. 11][para. 12][para. 13][para. 14].

Analysts agree that the surge is policy-driven, reinforced by state-backed interventions. After market volatility caused by external trade threats in April, major state investors purchased large amounts of ETFs, and the central bank cut key policy rates in June to stimulate growth. This triggered a speculative boom: margin debt surpassed 2 trillion yuan and quantitative funds outperformed traditional managers—recording a 24.4% average year-to-date return by August, well ahead of conventional funds’ 16.5% [para. 16][para. 17][para. 18][para. 19][para. 20][para. 21][para. 22][para. 23].

Yet, retail and foreign investors remain cautious. Retail investors, burned by previous cycles, require more sustained signals of a bull market, and foreign investors—though holdings have rebounded 600 billion yuan from 2024 lows—are not back in force, deterred by performance and policy uncertainties [para. 24][para. 25][para. 26][para. 27].

Households, holding savings nearly double 2019 levels, are seen as the biggest potential catalyst for further market gains, with estimates suggesting 5 to 7 trillion yuan could be diverted into stocks if favorable conditions persist [para. 28][para. 29][para. 30][para. 31][para. 32][para. 33][para. 34]. Major institutional players, particularly insurers, have increased their equity allocations, buying roughly 640 billion yuan of stocks in the first half of the year and supporting efforts to stabilize market cycles [para. 35][para. 36][para. 37][para. 38][para. 39][para. 40].

Nevertheless, concerns persist that the equity rally is disconnected from economic fundamentals. While blue-chip indices reflecting manufacturing and consumer sectors remain sluggish, the broader market is buoyed mainly by liquidity, not improving profitability or consumer sentiment. Experts argue that for a lasting “slow bull” market, China must implement structural reforms: improving IPO processes, easing M&A regulations, and overhauling trading rules to create a more robust and transparent capital market [para. 41][para. 42][para. 43][para. 44][para. 45][para. 46][para. 47][para. 48][para. 49].

Overall, while the rally is underpinned by policy and a shift in household savings trends, its sustainability will depend on both continued structural reforms and genuine economic improvements [para. 50][para. 51][para. 52].