Is China’s $1.3 Trillion Stock Rally a Bubble or a Structural Shift?

China’s stock market has surged to decade highs in 2025, with the Shanghai Composite and CSI 300 indices rising on the back of aggressive policy support, a shift of household savings into equities, and optimism in technology sectors like AI and semiconductors [1]. This $1.3 trillion rally has sparked a critical debate: is it a sustainable structural shift driven by innovation and policy, or a speculative bubble fueled by leverage and regulatory intervention?

Market Fundamentals: Policy-Driven Optimism vs. Economic Fragility

The rally is underpinned by a combination of monetary and fiscal stimulus. The People’s Bank of China (PBOC) has injected ¥1.5 trillion in liquidity through rate cuts and reserve requirement ratio (RRR) reductions, while the government has committed to a 4% general budget deficit to boost infrastructure spending [2]. These measures have lifted investor sentiment, particularly in sectors aligned with China’s “new productive forces” agenda, such as AI and semiconductors. For instance, ACM Research, a key player in semiconductor equipment, reported Q2 2025 earnings exceeding expectations, reflecting strong demand for domestic tech innovation [3].

However, the broader economy remains fragile. Real estate investment fell 11.2% in H1 2025, dragging on growth and local government finances [4]. Consumer demand is weak, with deflationary pressures persisting despite trade-in subsidies for automobiles and appliances. The MSCI China index trades at an 11x P/E ratio, a discount to global peers, but earnings growth has lagged China’s overall economic expansion [5]. This divergence raises questions about whether the rally is driven by fundamentals or liquidity.

Margin Debt and Leverage: Echoes of 2015?

Margin debt has reached ¥2.1 trillion, nearing the 2015 peak of ¥2.3 trillion [6]. While this is lower as a percentage of market float (2.2% vs. 4.4% in 2015), the rapid rise has prompted regulatory caution. Brokers like Sinolink Securities have raised margin deposit ratios to 100% for new clients, and fund managers have imposed purchase restrictions on high-performing portfolios [7]. These measures signal growing concerns about a potential correction, especially as retail participation remains subdued compared to the 2015 boom.

The current rally also differs from 2015 in its institutional focus. State-backed funds and high-net-worth investors are the primary drivers, with retail investors still wary of past crashes. This more measured participation reduces immediate volatility but does not eliminate the risk of a liquidity-driven reversal if policy support wanes.

Regulatory Reforms: Innovation vs. Stability

Regulatory changes in 2025 aim to balance growth and stability. The STAR Market, part of the Shanghai Stock Exchange, has introduced a “growth tier” for unprofitable tech companies, easing listing requirements for firms in AI, semiconductors, and commercial aviation [8]. This aligns with China’s push for technological self-reliance but also introduces risks, as unprofitable firms may struggle to meet profitability thresholds.

The China Securities Regulatory Commission (CSRC) has also deployed an 800 billion yuan facility to channel liquidity into the stock market, while local governments are incentivized to issue bonds for infrastructure projects [9]. These policies reflect a coordinated effort to stabilize markets but highlight the government’s role as a market participant, raising concerns about long-term sustainability.

Structural Risks and Investor Implications

The rally’s sustainability hinges on resolving structural imbalances. While policy support has boosted liquidity, China’s household savings remain heavily concentrated in real estate (60% of assets) rather than equities (1.3%) [10]. This limits the wealth effect of a rising stock market in stimulating consumption. Additionally, geopolitical risks—such as U.S. export restrictions on AI chips—could disrupt critical sectors like semiconductors, even as domestic firms like TSMC report record profits [11].

For investors, the key is to differentiate between sectors. AI and semiconductors show strong fundamentals, but property and traditional manufacturing remain vulnerable. A fundamentals-driven approach, focusing on companies with resilient earnings and structural growth potential, is advisable [12].

Conclusion: A Delicate Balance

China’s stock rally reflects a mix of policy optimism and economic fragility. While regulatory reforms and sectoral innovation suggest a structural shift, risks from leverage, weak consumption, and geopolitical tensions persist. Investors must weigh the potential for long-term growth against the likelihood of regulatory tightening or a liquidity-driven correction. For now, the rally appears more durable than in 2015, but vigilance is warranted as policymakers navigate the fine line between stimulus and stability.

Source:
[1] China Market Index 2025: Behind the Rally and What's Next [https://www.ebc.com/forex/china-market-index-2025-behind-the-rally-and-what-s-next]
[2] Assessing China's Stock Market Rally Amid Economic Weakness and Policy Support [https://www.ainvest.com/news/assessing-china-stock-market-rally-economic-weakness-policy-support-2508/]
[3] ACM Research: A Key Enabler of China's Semiconductor Push [https://www.ainvest.com/news/acm-research-key-enabler-china-semiconductor-push-q2-earnings-2508/]
[4] China Economic Update Report, Q2 2025 [https://arc-group.com/report/china-economic-update-report-q2-2025/]
[5] 2025 Midyear Investment Outlook - China Equities [https://www.invesco.com/apac/en/institutional/insights/equity/china-equities-outlook.html]
[6] China's $1 Trillion Stock Rally Spurs Curbs From Broker, Funds [https://finance.yahoo.com/news/china-1-trillion-stock-rally-024958280.html]
[7] China's $1 Trillion Stock Rally Spurs Curbs From Broker, Funds [https://finance.yahoo.com/news/china-1-trillion-stock-rally-024958280.html]
[8] China Daily｜STAR Market reforms good for tech gains [https://english.sse.com.cn/news/newsrelease/voice/c/c_20250619_10782407.shtml]
[9] Assessing the Sustainability of China's Record Stock Rally [https://www.ainvest.com/news/assessing-sustainability-china-record-stock-rally-rising-leverage-policy-tightening-2508/]
[10] China's Stock Boom Will Not Do Much to Rejuvenate Economy: Nomura [https://www.scmp.com/business/china-business/article/3323488/chinas-stock-boom-will-not-do-much-rejuvenate-economy-nomura-says]
[11] TSMC's Q2 2025 Earnings: Record Profits Amid AI Boom [https://vestedfinance.com/blog/us-stocks/tsmcs-q2-2025-earnings-record-numbers-but-uncertain-terrain-ahead/]
[12] 2025 Midyear Asia Equity Outlook: Tackling Uncertainty [https://www.pinebridge.com/en/insights/2025-midyear-asia-equity-outlook-tackling-uncertainty-one-quality-stock-at-a]