Assessing China’s Stock Market Rally Amid Economic Weakness and Policy Support

China’s stock market has experienced a remarkable rally in 2025, with the Shanghai Composite and CSI 300 indices reaching decade highs. This surge, driven by optimism in technology sectors and renewed policy support, has drawn both domestic and foreign investors. Yet, the broader economy remains fragile, with structural challenges such as a real estate slump and deflationary pressures persisting. The question for global investors is whether this rally is a durable bull run or a temporary rebound fueled by short-term stimulus.

The current economic context is mixed. While Q2 GDP growth slowed to 5.2% year-on-year, industrial output rose robustly to 6.8% in June, supported by global demand and a temporary easing of US-China trade tensions [1]. However, domestic consumption remains weak, and the real estate sector continues to contract, dragging on broader economic momentum. To counter these headwinds, the Chinese government has implemented a 4% general budget deficit and interest rate cuts to boost liquidity and infrastructure spending [1]. These measures have injected confidence into equity markets, particularly in large-cap technology and fintech stocks, which have become the primary beneficiaries of the rally [2].

The sustainability of the rally hinges on two factors: the effectiveness of policy support and the resilience of foreign capital inflows. Goldman Sachs notes that a significant amount of idle capital remains untapped, particularly in small and mid-cap stocks, suggesting room for further market expansion [2]. Meanwhile, 90% of global hedge funds now hold long positions in Chinese equities, reflecting a shift in investor sentiment from skepticism to cautious optimism [2]. This trend is reinforced by a weakening U.S. dollar, which has made emerging markets more attractive to global investors seeking diversification [2].

Yet, structural risks cannot be ignored. The real estate sector’s collapse continues to weigh on household wealth and local government finances, while regulatory uncertainties—particularly in tech and fintech—remain a wildcard [3]. A durable bull run will require not only continued fiscal and monetary stimulus but also structural reforms to address these imbalances. For now, the market appears to be pricing in a scenario where policy support outweighs these risks, but this calculus could shift rapidly if economic data deteriorates or geopolitical tensions resurface.

For global investors, the rally presents both opportunities and hazards. The current surge is less speculative than previous booms, with strong participation from institutional investors and a focus on fundamentals [2]. However, exposure to Chinese equities remains concentrated in a few sectors and companies, amplifying vulnerability to regulatory shocks. A diversified approach, hedging against currency and geopolitical risks, is essential.

In conclusion, China’s stock market rally is a product of aggressive policy support and global capital flows, but its sustainability depends on resolving deeper structural issues. While the immediate outlook is cautiously optimistic, long-term success will require a rebalancing of the economy toward consumption and innovation—a challenge that remains unmet.

Source:
[1] The Chinese economy: stimulus without rebalancing [https://www.bruegel.org/analysis/chinese-economy-stimulus-without-rebalancing]
[2] China Daily｜A-share rally draws global investors [https://english.sse.com.cn/news/newsrelease/voice/c/c_20250825_10789585.shtml]
[3] China's Stock Rally Has The Makings of a Durable Bull Run [https://www.bloomberg.com/news/articles/2025-08-18/china-s-stock-rally-has-the-makings-of-a-durable-bull-run]