Post-Holiday Rally in Chinese Equities: A Strategic Entry Point or Overbought Optimism?

The Chinese equity market's post-Golden Week 2025 performance has ignited a heated debate among investors and analysts: Is the rally a sustainable recovery driven by structural reforms and policy support, or is it a short-term overbought surge fueled by speculative optimism? With mainland markets surging over 10% on the first trading day after the holiday, according to Invesco's midyear outlook and a record $12 billion inflow into Chinese equity funds, per weekly flows data, the market's momentum appears robust. However, technical indicators and sector-specific underperformance suggest a nuanced picture.

Market Sentiment: Stimulus-Driven Optimism and Consumer Resilience

The rebound in Chinese equities has been underpinned by a combination of government stimulus and renewed consumer activity. The extended eight-day Golden Week holiday, which merged National Day and Mid-Autumn Festival celebrations, spurred a service-sector boom. Tax-free shopping initiatives, extended museum hours, and travel incentives revitalized sectors like gaming, baijiu, and airlines, according to a Bloomberg report. According to Bloomberg, this pivot toward a service-led economy has rekindled expectations of stable consumer spending, with analysts noting that such policies could stabilize and even boost consumer stock valuations.

According to Goldman Sachs, the firm has amplified this optimism, raising its MSCI China target price to 84 and forecasting a 15–20% upside in 2025. The firm attributes this to policy-driven earnings growth (7% in 2025, 10% in 2026) and a narrowing valuation gap compared to U.S. equities, with the MSCI China P/E ratio at 11x versus 25x for the S&P 500. Meanwhile, domestic retail investors have returned to the market, and hedge funds have unwound bearish positions, contributing to the CSI 300's 16% five-day gain-the best since the 2008 financial crisis.

Positioning and Technical Indicators: Overbought Conditions and Structural Risks

Despite the bullish narrative, technical analysis paints a cautionary tale. The Relative Strength Index (RSI) for the CSI 300 surged above 70 post-holiday, signaling overbought conditions, according to an RSI primer. Moving averages, while confirming an upward trend, also highlight volatility, with the Shanghai Composite and Shenzhen Component indices recording modest gains of 0.13% and 0.38% on September 10, 2025, despite weaker-than-expected inflation data.

Sectoral divergence further complicates the outlook. While healthcare and real estate stocks drove the mainland rally, travel-related equities like Trip.com and China Tourism Group Duty Free fell under pressure due to weaker-than-expected Golden Week data. Analysts warn that the uneven recovery-marked by elevated demand compared to pre-pandemic levels but uneven sectoral performance-has heightened investor caution.

Fund flows also reveal mixed signals. EPFR data shows a 50.78% correlation between China Share Class Flows and Northbound Stock Connect flows, indicating strong directional alignment but also short-term volatility. While inflows into Chinese equity ETFs accelerated post-stimulus announcements, global active funds remain underweight, with foreign participation skewed toward passive investments.

Strategic Considerations: Balancing Optimism and Caution

The debate hinges on whether the current rally reflects a durable recovery or a temporary overcorrection. Goldman Sachs and other bullish analysts argue that the MSCI China's valuation discount and policy tailwinds justify a long-term position. However, skeptics caution against complacency. As one outlook notes, the fragility of the consumption recovery-exacerbated by a still-weak property sector and geopolitical uncertainties-could trigger an "ugly reversal in sentiment into 2025" if stimulus proves insufficient.

For investors, the key lies in hedging against both overbought conditions and structural risks. Technical tools like RSI and moving averages suggest short-term corrections are likely, while sector rotation toward financials and insurance (Goldman's overweight picks) could mitigate exposure to underperforming discretionary sectors.

Conclusion

The post-Golden Week rally in Chinese equities reflects a fragile equilibrium between policy-driven optimism and market skepticism. While stimulus measures and consumer resilience have reignited investor confidence, overbought technical indicators and sectoral imbalances underscore the need for caution. For strategic investors, the current environment offers both opportunities-via undervalued valuations and long-term growth potential-and risks, necessitating a disciplined approach to positioning and risk management.```