China’s economy is buckling under the weight of tariffs and a deep-rooted property crisis, yet stocks are extending their bull run – a disconnect that is stirring doubts on the rally’s staying power.
In just the past month, onshore stocks have added almost a trillion dollars to their market value, the Shanghai Composite Index has hit a decade-high, and the CSI 300 Index has taken its advance from 2025’s low to more than 20 per cent. That is when nearly every recent economic indicator – from consumption trends, home prices to inflation – has brought red flags for investors.
The rally has been driven by cash-rich investors shifting into stocks amid a lack of alternatives. While the market’s steady advance may suggest less risk of a sudden correction, some analysts are warning that a bubble is in the making. Nomura Holdings is cautioning against “irrational exuberance” while TS Lombard is calling the mismatch a stand-off between “market bulls and macro bears”.
“Markets might be expecting, either correctly or incorrectly, that macroeconomic fundamentals will improve,” said Mr Homin Lee, senior macro strategist at Lombard Odier in Singapore. “But a bull market will not be sustainable if inflation remains close to 0 per cent and corporate pricing power faces severe headwinds from weak domestic demand.”
A deflationary spiral that has eroded corporate pricing power in the world’s second-largest economy is one of the biggest reasons to doubt the sustainability of the current rally.
Consumer prices were flat in July, producer prices fell for a 34th month, and the gross domestic product deflator extended its negative streak. While Beijing has embarked on a campaign to curb overcapacity and rein in price wars, it has had limited impact so far.
The 12-month forward earnings estimate for CSI 300 members has slipped 2.5 per cent from 2025’s high. Intense price competition has hit profits for the likes of JD.com and Geely Automobile Holdings.
The troubling picture has fuelled expectations that Beijing will step up support. But the policy roll-out so far suggests officials are steering away from the large-scale stimulus playbook, instead preferring a measured approach.
Equity gains are also complicating policy response to the economy’s slowdown, according to Nomura, as pro-growth measures risk inflating a stock-market bubble.
Market watchers are also drawing comparisons to the start of the 2015 boom-bust cycle. Back then, a surge in margin trading sent stocks soaring before a clampdown on such leveraged activities triggered an epic crash.
While current gains are far more measured than the meteoric rise seen a decade ago, the lacklustre economy and falling factory prices draw uncomfortable parallels. As with today’s artificial intelligence boom, new technologies from the “Internet Plus” initiative to big data were fuelling fervour back then.
The amount of outstanding margin debt is at 2.1 trillion yuan (S$376 billion), compared with 2.3 trillion yuan at the 2015 peak. China’s equity gains tend to have strong correlations with liquidity as well as margin balances.
“The abundant liquidity in the market and the gradual wake-up of animal spirits remind us of the crazy times a decade ago,” said Lotus Asset Management chief investment officer Hao Hong. “Of course, it is still early days.”
There are, of course, reasons to believe the gains can be sustained. The pace of increase in equity positions has been more measured compared with some past cycles. And in recent days, the rally has broadened out to include a wider swathe of the market, indicating more durable momentum.
“There are larger deposit reservoirs, stronger technology companies, and more direct market rescue policies, all of which are far stronger than a decade ago,” said Asymptote Investment Research head Zhu Zhenxin.
Despite those supportive factors, China’s uncertain macro backdrop is making some analysts more selective. Ms Jasmine Duan, senior investment strategist at RBC Wealth Management Asia, said she is avoiding sectors where profits are affected by a deflationary environment, or highly competitive sectors that are seeing margin pressures.
China’s bull market “is more of a mystery box than a conventional growth story”, said Ms Hebe Chen, an analyst at Vantage Markets in Melbourne. “The risk is that once sentiment fades, investors would flee in no time.” BLOOMBERG