In recent times, the Chinese stock market has hit a new high in nearly a decade. However, analysts believe that this surge in the stock market is not being primarily driven by an improvement in economic fundamentals, but rather by a combination of various factors artificially creating a bull market. A bubble is forming in the Chinese stock market, and it may be difficult for the bull market to sustain itself, so Chinese investors need to be cautious and aware of potential risks.
Last week, the Shanghai Composite Index hit a high of 3800 points, reaching a new high in almost ten years. In the past month, the market value of the Chinese stock market has increased by nearly $1 trillion, with the Shanghai and Shenzhen 300 Index rising by over 20% compared to the yearly low.
However, many sectors are not optimistic about the Chinese stock market, believing that this bull market is not being driven by a turnaround in China’s economic fundamentals but rather by a combination of other factors artificially creating the rally.
Key economic indicators, from consumption, investment to inflation, and the real estate market, are raising warning signs for investors.
In July, China’s Consumer Price Index (CPI) remained flat year-on-year, while the Producer Price Index (PPI) continued to decline for the 34th consecutive month, and the Gross Domestic Product (GDP) deflator also remained negative. Despite government efforts to curb overcapacity and control price competition, the effectiveness has been limited.
The real estate market has not yet bottomed out. Recent data released by the National Bureau of Statistics of China shows a 12% year-on-year decrease in national real estate development investment from January to July, a 4% decrease in the sales area of newly constructed commercial residential buildings, a 6.5% decrease in sales volume, and a 2.4% year-on-year decrease in the average selling price of commercial residential buildings.
Consumption continues to decline. In July, China’s total retail sales of consumer goods amounted to 3.878 trillion yuan, down 1.1% month-on-month, while in June, it decreased by 1.6%.
Fixed asset investment continues to decline. In June, fixed asset investment (excluding rural households) decreased by 0.12% month-on-month, and in July, it decreased by 0.63% month-on-month.
Chinese issues expert Wang He believes that four reasons have driven up the Chinese stock market.
Firstly, household deposits have decreased significantly, leading to funds flowing into the stock market and a significant increase in new investors in recent months.
Secondly, margin financing has reached historical highs, with investors leveraging to trade in the market.
Thirdly, Chinese government policies have aimed to boost the stock market, and the national team has intervened to raise stock market indices.
Fourthly, foreign capital inflows have entered the Chinese stock market, facilitating high-frequency trading operations and pushing the market to historical highs again.
American economist Huang David also notes that low bank deposit interest rates have caused a shift of household deposits into the stock market. The sluggish real estate market and low savings returns have left households with significant funds seeking better investment opportunities, thereby flowing into the stock market.
He points out that the recent surge in A-shares has two additional reasons. Firstly, due to policy support and industry boosts, such as promoting AI and semiconductor industries and the easing of US-China trade tensions, which has provided short-term positive news for the stock market.
He also mentions the role of the ‘national team’ in stabilizing the market during major events or unstable market conditions, as seen before the September 3rd celebration in China.
Both Wang He and Huang David believe that the current bull market in A-shares may not be sustainable. David emphasizes that it is a result of policy and fund-driven “short-term prosperity” that does not accurately reflect the economic structure’s real situation.
Wang He bluntly states that the Chinese stock market has always been detached from China’s economic fundamentals. Without support from economic fundamentals, the current bull market is unlikely to last.
Furthermore, they warn of a potential bubble forming in the Chinese stock market. Analysts from Nomura Holdings cautioned against the “irrational prosperity,” while TS Lombard described the current situation as a standoff between bullish and bearish sentiments.
The tight monetary conditions in China have weakened companies’ pricing power, leading to doubts that the current stock market surge can be sustained.
Jasmine Duan, Senior Investment Strategy Analyst at Royal Bank of Canada Wealth Management Asia, advises avoiding industries affected by deflationary environments and those facing fierce competitive pressures on profit margins.
Analysts like Hebe Chen from the VIG Group in Melbourne warn that the current bull market in China is more of a mysterious box than a traditional growth story. Once market enthusiasm fades, investors may quickly flee.
According to Professor Fan Jiazhong, an economist at Taiwan University, China’s tightening monetary policy is leading the stock market farther away from its fundamentals, increasing the risk of a significant downturn.
Wang He believes that the bubble in the Chinese stock market has become apparent, and rational investors should gradually withdraw from the market. The situation may undergo changes following the September 3rd celebration, suggesting that the current enthusiasm may not continue long-term.
David advises investors to remain cautious, adopt a short-term speculative mindset, avoid heavy long-term positions, consider investing in bond funds, currency funds, and other stable assets to reduce concentration risk.