Assessing the Sustainability of China's Record Stock Rally Amid Rising Leverage and Policy Tightening

China’s stock market has surged to record levels in 2025, driven by aggressive liquidity injections and structural policy support. However, the rally has raised concerns about rising leverage and the sustainability of gains amid tightening regulatory scrutiny. This article examines the liquidity-driven forces fueling the market and evaluates the risk mitigation strategies deployed by regulators to balance growth with stability.

Liquidity-Driven Market Dynamics

The People’s Bank of China (PBOC) has adopted a “moderately accommodative” monetary policy to stabilize liquidity and lower financing costs. Key measures include a 0.5 percentage point RRR reduction, injecting RMB 1 trillion into the financial system, and structural rate cuts for sectors like agriculture, SMEs, and housing provident fund loans [3]. These actions aim to stimulate credit growth in innovation-driven and service-oriented industries while maintaining exchange rate stability [4].

The PBOC’s 10-point monetary package also includes targeted RRR exemptions for auto finance and leasing firms and a RMB 500 billion relending facility to boost consumer services and elderly care [3]. Such tools reflect a dual focus on broad liquidity support and sectoral development. Meanwhile, the China Securities Regulatory Commission (CSRC) has collaborated with the PBOC to channel liquidity into the stock market through an 800 billion yuan facility and a swap mechanism for institutional investors [1].

However, the surge in margin trading—exceeding RMB 2.1 trillion in balances—has heightened risks. Brokerages like Sinolink Securities have raised margin deposit ratios to 100% for new clients, signaling caution amid fears of a correction [1]. This underscores the tension between liquidity-driven gains and the potential for leverage-driven volatility.

Risk Mitigation Strategies Beyond Liquidity

Regulators have implemented a multi-pronged approach to curb systemic risks. A RMB 500 billion stock market stabilization fund has been established to absorb shocks, while a RMB 14.3 trillion local government debt restructuring plan aims to stabilize the property sector and boost consumption [5]. These measures address both immediate liquidity needs and long-term structural vulnerabilities.

The CSRC has also prioritized institutional reforms, including STAR Market and ChiNext Board enhancements to improve market inclusivity and streamline M&A activity [1]. Central Huijin Investment Ltd., a sovereign wealth fund, has been encouraged to increase holdings in stock-based ETFs, promoting passive investment and stabilizing market expectations [4]. Additionally, the National Financial Regulatory Administration (NFRA) has adjusted insurance fund investment rules, reducing the risk factor for stock investments by 10% to incentivize capital inflows [4].

Balancing Growth and Stability

While these measures demonstrate a proactive stance, challenges persist. The PBOC’s emphasis on exchange rate stability amid global trade tensions and domestic consumption slowdowns complicates policy execution [2]. Moreover, the rapid influx of retail investors—driven by low borrowing costs and speculative fervor—risks creating a new bubble reminiscent of the 2015 crisis [1].

Conclusion

China’s 2025 stock rally is underpinned by a blend of liquidity support and structural reforms, but its sustainability hinges on the effectiveness of risk mitigation strategies. The PBOC and CSRC’s coordinated efforts to manage leverage, stabilize debt, and enhance market mechanisms provide a buffer against volatility. However, the interplay between aggressive monetary easing and regulatory tightening remains a critical test for policymakers. Investors must weigh the potential for continued growth against the risks of overleveraging and policy reversals in a rapidly evolving landscape.

Source:
[1] China Unveils 10-Point Monetary Package to Stabilize Markets [https://www.china-briefing.com/news/china-10-point-monetary-package-market-stabilization/]
[2] China's central bank pledges to speed up policy response to economic conditions [https://www.reuters.com/markets/asia/chinas-central-bank-pledges-speed-up-policy-response-economic-conditions-2025-06-27/]
[3] Central Bank: Implement a moderately loose monetary policy [https://www.metal.com/en/newscontent/103317954]
[4] Steps taken to ensure market stability [https://www.chinadailyhk.com/hk/article/609346]
[5] Assessing the Risks and Rewards of China's Current Stock Market Rally [https://www.ainvest.com/news/assessing-risks-rewards-china-current-stock-market-rally-structural-caution-policy-support-2508/]