Commentary: What’s Behind China’s ‘Liquidity Bull Market’ Debate

Liquidity is essential for the efficient functioning of financial markets. In the context of China’s A-share market, liquidity refers both to the ease and cost of converting assets to cash and to the broader funding and trading environment. High liquidity is characterized by abundant buy and sell orders, narrow bid-ask spreads, and low transaction costs, whereas low liquidity leads to larger gaps in prices, slower transactions, and higher conversion costs. After previous analyses of U.S. dollar and Chinese bond market liquidity, this article focuses on the A-share market[para. 1].

The term “liquidity-driven bull market” has become widely discussed in China since the rally that began in September 2024. While ample liquidity is necessary to revive trading volumes and performance, doubts persist among investors regarding the sustainability and robustness of such a rally. A bull market cannot persist on liquidity alone; economic fundamentals and corporate earnings are also critical. This introduces two main controversies: sustainability and robustness of the liquidity-fueled rally[para. 2].

Historical precedent—from 2018, when strong liquidity and economic fundamentals failed to spark a bull market—illustrates that other returns, notably from real estate, can attract capital away from stocks. In 2018, real estate outperformed stocks despite supportive policies, financial reforms, and a growing GDP, underscoring the importance of asset substitution as a third key issue[para. 3][para. 4].

After comprehensive reform packages to stabilize the capital market on September 24, 2024, and April 7, 2025, China’s market structure, policy, and funding ecosystem underwent fundamental transformation. The current liquidity-driven rally stands apart in several ways from previous episodes[para. 5].

First, macro-level liquidity improvements, including coordinated interest rate cuts by both the U.S. Federal Reserve and the People’s Bank of China (PBOC), have lowered financing costs and increased available funds, benefitting both primary and secondary markets[para. 6].

Second, improved institutional (“meso-liquidity”) conditions via new long-term policy tools and swap facilities for non-bank financial institutions have addressed sustainability concerns by providing ongoing support for market participants[para. 7]. Encouragement from the China Securities Regulatory Commission for long-term institutional funds—pension, insurance, social security—to enter the market has provided a stabilizing force and tackled the robustness issue. Specific policy changes were implemented to remove bottlenecks and support early-stage and technology companies[para. 8].

At the micro level, there has been a significant shift of household savings (“deposit migration”) into equities. While deposit growth slowed in 2024 compared to the pandemic years, it remained well above the pre-pandemic average. The positive feedback loop—of market performance attracting further savings and new retail participants—was evident, with nearly 3 million new A-share accounts opened from January to September 2025, up 60% year-on-year[para. 9].

Market performance reflected this increased liquidity and optimism. Major A-share indexes posted strong gains in the first three quarters of 2025—large-cap indexes rose nearly 20%, small and mid-cap indexes over 30%, and tech-heavy indexes surged more than 50%. Since the April 7, 2025, policy package, these gains accelerated, especially in technology sectors, aided by factors such as expectations for domestic substitution amidst tariff disputes[para. 11][para. 12].

Trading indicators showed that both price and volume increased together, a positive signal, with total 2025 trading volume up 73% and value up 145% since January. Market activity peaked in September, while May saw a lull due to delayed tariff shock effects. ETFs are now the main contributor to trading volume, even as main boards dominate value[para. 17][para. 19].

Turnover rates, a metric of market activity, rebounded after periods of risk aversion due to U.S. tariffs. By sector, defense, computers, power equipment, and textiles saw high turnover. Valuations, as measured by P/E ratios, have risen significantly for tech sectors, with the STAR Market’s P/E at 263x[para. 20][para. 21].

Investor behavior shows high margin trading in growth sectors like electronics and financials, with foreign “smart money” and mutual funds favoring banking, non-bank financials, and medicine. Passive investing has outpaced active fund management[para. 22][para. 23][para. 24].

In summary, China’s A-share market liquidity has been fundamentally restructured through policy, institutional engagement, and household savings migration, driving broad gains in prices, trading volumes, and investor participation, with ongoing reforms set to underpin these trends moving forward[para. 5][para. 6][para. 7][para. 8][para. 9][para. 11][para. 12][para. 17][para. 19][para. 20][para. 21][para. 22][para. 23][para. 24].