Wall Street Analysts Debate Sustainability of China's Stock Rally Amid Weak Macro Indicators

Goldman Sachs has boosted its 12-month target for the CSI 300 Index to 4,900 from 4,500, citing supportive valuation metrics and favorable market positioning. In contrast, Morgan Stanley analysts are more cautious, flagging emerging signs of market overheating. The rally in Chinese stocks appears fueled by liquidity rather than lasting economic strength.

Goldman Sachs has significantly increased its 12-month target for the CSI 300 Index, raising it to 4,900 from 4,500. The investment bank attributes this upward revision to supportive valuation metrics and favorable market positioning [1]. Meanwhile, Morgan Stanley analysts have expressed caution, noting emerging signs of market overheating [1].

The recent rally in Chinese stocks, which has seen the CSI 300 Index gain nearly 10% this month, is largely driven by liquidity rather than robust economic fundamentals. Goldman Sachs strategists suggest that liquidity factors and valuation expansion have been the primary drivers of the equity gains, not cyclical macro fundamentals [1]. Morgan Stanley analysts, however, warn that while corporate fundamentals and policy support are improving, they need to follow through quickly to sustain the rally [1].

Chinese stocks have experienced a liquidity-driven euphoria, with turnover on Shanghai and Shenzhen exchanges reaching a combined 3.1 trillion yuan ($433 billion) — the second highest on record [2]. This surge has been fueled by optimism over government support measures, expectations of improved corporate earnings, and the potential impact of AI on the market [2]. However, signs of overheating are becoming increasingly apparent, with some key benchmarks up more than 20% from their year's low [2].

The disconnect between the stock market performance and the still-weak economic backdrop has raised concerns among analysts. The 14-day relative strength index on the Shanghai Composite Index was at 88 on Monday, indicating that shares are overbought [2]. The premium on thematic ETFs, such as the CPIC SSE STAR Chip Design Thematic ETF, has also reached record highs, suggesting that investors are bidding up the funds beyond their underlying asset values [2].

As the rally continues, investors must navigate the varying risk profiles presented by the differing views of analysts. While Goldman Sachs sees the uptrend as sustainable, Morgan Stanley's caution underscores the potential risks associated with a market overheating. The key to sustaining the rally lies in the fundamentals and long-term macro growth outlook, which need to align with the current liquidity-driven gains [1].

References:
[1] https://www.bloomberg.com/news/articles/2025-08-29/goldman-boosts-china-stock-targets-as-morgan-stanley-flags-risks
[2] https://finance.yahoo.com/news/chinese-stock-euphoria-spreads-turnover-093545585.html