The Drivers and Sustainability of China's 10-Year Market High

China's equity markets have reached a 10-year high as of August 2025, defying expectations amid a Q1 capital outflow of $165.6 billion [1]. This paradox—rising markets amid net outflows—points to two critical forces: policy-driven domestic reallocation of household assets and structural macroeconomic rebalancing. While foreign capital has retreated, the government's push to shift consumption and services to the forefront of growth has created a self-sustaining engine for equities.

Macroeconomic Rebalancing: A Structural Tailwind

China's transition from an investment- and export-driven model to one centered on consumption and high-value services has been a long-term strategy. By 2025, this rebalancing has begun to bear fruit. Approximately 25% of Chinese household assets remain in cash and deposits [1], a legacy of decades of risk-averse savings behavior. However, recent policy initiatives—such as tax incentives for retail investors and relaxed regulations on equity ownership—have spurred a gradual reallocation of these funds into equities. This shift, though modest, has injected liquidity into markets and boosted demand for stocks in sectors like consumer discretionary and technology.

Structural reforms, including antitrust measures and support for innovation-driven industries, have also enhanced investor confidence. For instance, the government's emphasis on “high-quality development” has prioritized sectors with long-term growth potential, such as renewable energy and AI, attracting both retail and institutional buyers [2].

Domestic Inflows vs. Foreign Outflows

Despite a Q1 capital account deficit, domestic inflows have offset foreign outflows. The World Bank notes that China's 5.0% GDP growth in H1 2024 was fueled by public infrastructure spending and service-sector consumption [2]. These macroeconomic gains have indirectly supported equities, as improved corporate earnings and policy stability attract domestic investors.

However, challenges persist. The property market slump and weak business confidence continue to weigh on broader economic momentum [1]. Yet, the government's recent stimulus measures—such as targeted credit easing and fiscal support for small businesses—suggest a commitment to stabilizing growth while advancing rebalancing goals.

Sustainability: A Delicate Balance

The sustainability of the 10-year high hinges on two factors: the pace of domestic asset reallocation and the success of structural reforms. If even 10% of the $2.5 trillion in household cash is redirected to equities over the next five years, it could generate a sustained bull market. Conversely, demographic headwinds—such as a shrinking working-age population and slowing productivity—pose risks to long-term growth [2].

Investors must also weigh the geopolitical context. While foreign capital has retreated due to regulatory uncertainties and trade tensions, domestic demand remains resilient. This suggests that China's equity rally is less dependent on global sentiment and more on internal policy execution.

Conclusion

China's 10-year market high reflects a unique confluence of policy-driven domestic inflows and macroeconomic rebalancing. While structural challenges remain, the government's focus on consumption and innovation has created a foundation for sustained growth. For investors, the key will be monitoring the pace of asset reallocation and the effectiveness of reforms in addressing productivity and demographic constraints.

Source:
[1] China and emerging markets outlook 2025: Crisis or hope?,
https://am.jpmorgan.com/gb/en/asset-management/per/insights/market-insights/investment-outlook/china-and-emerging-markets-outlook/
[2] China Overview: Development news, research, data,
https://www.worldbank.org/en/country/china/overview