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

Chinese stocks have experienced a dramatic rally, pushing the total market capitalization above 100 trillion yuan ($13.9 trillion) and the Shanghai Composite Index to highs not seen in nearly a decade, reaching 3,745.94 on August 18 from around 3,000 points on June 23, 2025. This surge, accompanied by trading volumes surpassing 2.8 trillion yuan in a single day and the participation of nearly 4,000 stocks, has led to a heated debate over whether this marks the beginning of a durable “slow bull” market or is simply a speculative upswing out of step with underlying economic conditions [para. 1][para. 3].

Retail investor enthusiasm is reminiscent of previous bull markets, with new investors flooding in and seeking tips, a sentiment that has often been a hallmark of retail-driven booms in China. Optimists argue that this rally has more staying power compared to previous cycles, citing strong policy support and increased participation from institutional investors such as insurers and private equity funds. They point to a positive feedback loop: rising markets attract more household savings into stocks, reinforcing gains. China’s households have built up record bank deposits of 162 trillion yuan by the end of June 2025, and as interest rates fall, there is growing expectation that more of these savings may move into equities, with non-bank deposits increasing by 1.4 trillion yuan in July, much of it intended for financial investments [para. 2][para. 5][para. 6][para. 7][para. 8][para. 9].

Despite this optimism, concerns loom over the rally’s sustainability. The economic backdrop is troubling, featuring weak corporate earnings, falling consumer confidence, and lackluster macroeconomic indicators. For example, in July, the consumer price index was flat, new credit growth turned negative for the first time in two decades, and just over a quarter of nearly 1,600 A-share companies predicted profit increases for the interim period. Skeptics point out that psychological euphoria has often led to swift reversals in past markets, and the current financial data does not provide strong support for a prolonged bull run [para. 4][para. 10][para. 11][para. 12][para. 13][para. 14][para. 15].

The rally has been fueled in large part by policy-driven factors. The Chinese government, responding to downturns worsened by U.S. tariff threats, injected liquidity and state-backed entities purchased large quantities of ETFs. The central bank cut key policy rates by 10 basis points in June, turning decisively toward an easing stance. Capital flowed into equities at record rates, and margin debt surged past 2 trillion yuan, indicating a heightened speculative appetite. Quantitative funds, which accounted for 45% of new securities fund registrations in the first half of the year, have significantly outperformed traditional funds, with average returns of 24.4% versus 16.5%. However, large-scale retail and foreign investor participation has so far lagged; both groups remain cautious after painful losses in recent years or due to policy uncertainty [para. 16][para. 17][para. 18][para. 19][para. 20][para. 21][para. 22][para. 23][para. 24][para. 25][para. 26].

Long-term, institutional “patient capital,” particularly from insurers, is increasingly important. Regulators have encouraged pension and insurance funds to raise their equity allocations, and eased rules to facilitate such shifts, resulting in a net purchase of approximately 640 billion yuan in the first half of the year. However, some insurers remain skeptical of the rally’s fundamentals and are pursuing a wait-and-see approach [para. 36][para. 37][para. 38][para. 39][para. 40].

Market observers emphasize that for a true and sustainable bull market, the stock market must reflect real economic recovery, not just liquidity-driven fervor. The CSI 300 index has lagged the headline surge, reflecting continued weak fundamentals, deflationary pressures, and tepid profitability among companies. Structural reforms—to improve IPO and secondary financing systems, streamline M&A, and modernize trading rules—are considered essential for transforming the market into a robust, reliable engine of capital allocation and price discovery [para. 41][para. 42][para. 43][para. 44][para. 45][para. 46][para. 47][para. 48][para. 49][para. 50][para. 51].