Commentary: China’s Roaring Bull Market Is a Two-Speed Rally

Every bull market follows a narrative shaped by investor sentiment, which rises from pessimism and eventually succumbs to euphoria. Understanding these shifts in mood is crucial to gauging the potential longevity and maturity of an asset rally. To achieve this, the analysis uses a composite market sentiment index that considers five key dimensions: “Volume,” “Price,” “Capital,” “Valuation,” and “Risk Premium” [para. 1].

The current bull market began in September 2024, and when compared to the liquidity-driven rally of May 2014 to June 2015, some similarities and notable differences emerge. Trading volume and turnover sentiment indicators are now reaching the intense levels seen at the previous cycle’s peak, but capital flows, valuations, and risk appetite remain significantly lower—suggesting the character of the current rally is more structural. For a full-fledged bull market to materialize, sentiment in these yet-lagging areas must accelerate [para. 2][para. 3].

The composite index synthesizes 12 distinct indicators. “Volume” assesses a stock’s trading value relative to market capitalization and its turnover rate. “Price” monitors the proportion of stocks closing higher daily and over recent months. “Capital” incorporates net active buying, mutual-fund equity positions, and margin financing. “Valuation” is based on price-to-earnings and price-to-book ratios across the market and sectors, while “Risk Premium” examines the gap between implied equity yield and the 10-year government bond yield [para. 4].

To produce a comprehensive sentiment score, each indicator is ranked historically, and the average is taken. The index has proven to be a reliable predictive tool: in 2014-2015, sentiment peaked before the market itself, and in the current cycle, sentiment also reached a temporary summit about a month ahead of the market [para. 5].

The most apt historical comparison is the 2014-15 rally. Both occurred during periods of weak real economic growth and deflationary pressures on producer prices, with many commentators dismissing them as phenomena driven solely by liquidity. However, the article argues that bull markets often start at a turning point in negative expectations, rather than as a reaction to improved economic fundamentals [para. 6].

During the 2014-15 rally, the sentiment index hit a 95.5% peak, but in the current cycle, it has only reached 78.7% [para. 7]. Notably, trading volume and turnover are at their highest historical levels, but capital activity—comprising active buying, margin financing, and mutual-fund positions—remains below previous peaks, as do valuation and risk premium sentiment measures [para. 8].

This results in a market that is simultaneously “hot and cold.” The frenzy in volume is attributed to declining returns in bonds, deposits, and real estate, forcing risk capital into equities, particularly in high-turnover, low-cap technology stocks. However, capital and valuation sentiment remain lower, possibly due to traditional measures failing to capture inflows from longer-term insurers and wealthy private investors, while market valuations reflect divergence between sectors [para. 9][para. 10][para. 11].

When isolating technology stocks, sentiment and leverage have surpassed levels seen in the broader market and even the previous bull run, with market activity and valuations skewed towards tech [para. 12].

For the rally to evolve into a comprehensive bull market, there needs to be more sustained capital inflow and broader sector participation, spurred by factors like new macroeconomic policies or economic improvement, especially in consumer and cyclical sectors—a shift unlikely to occur before a major uptick in domestic demand [para. 13].