China’s Stock Market Rally: A Mixed Picture

By Samuel Shen and Summer Zhen

SHANGHAI/HONG KONG (Reuters) – China’s stock market is experiencing significant growth, boosted by state funding and institutional investments. Analysts believe that the lack of retail investor excitement indicates the rally could be sustainable, even amidst a sluggish economic recovery.

The Shanghai Composite Index has risen by 25% since April, reaching 10-year highs, contrasting sharply with the struggling economy characterized by a property crisis and weak consumption.

Analysts express optimism, noting that the rally has been primarily fueled by sovereign funds and institutional investors, while early retail buying signs emerge. Chen Haoyang, a Shanghai fund manager, stated, “Stocks can go up even in a slowing economy” due to fresh capital inflows.

Chinese households, with savings totaling 160 trillion yuan ($22.33 trillion), are hesitant to spend or invest but some cash is now moving from banks to trading accounts. Individual deposits fell by 1.1 trillion yuan in July, while non-banking financial institution deposits rose by 2.1 trillion yuan.

Max Gu from Citic Securities mentioned that clients are shifting funds due to declining interest rates. Retail deposits maturing soon could also flow into stocks, with estimates indicating potential new investments of around 1.84 trillion yuan.

Current treasury yields are around 1.7%, while banks offer less than 1% for one-year deposits. In contrast, the blue-chip CSI300 Index provides a dividend yield of approximately 2.5%. Nomura analysts predict that the stock rally could attract more investors, creating a self-fulfilling cycle.

However, concerns arise regarding the similarities to the 2015 market surge, which ended in a crash. This time, analysts note, the capital driving the current rally is mainly long-term institutional investments rather than retail borrowing.

While the market shows growth, there is a dissonance between declining economic indicators and increasing investor enthusiasm. Policymakers may need to be cautious about stimulating the economy to avoid inflating a stock market bubble.

Despite the bullish outlook, Gu indicates retail frenzy remains absent, with only 1.9 million new retail accounts opened in July, compared to 7 million during the peak of 2015.

China’s stock trading has exceeded 2 trillion yuan for 11 consecutive days, marking a record streak, although margin trading remains low at 2.2% of the floating market capitalization.

Homin Lee from Lombard Odier cautions that economic shortcomings continue to limit more aggressive market positions, reinforcing concern for long-term investments.

($1 = 7.1651 Chinese yuan renminbi)