Recent debates have centred on the sustainability of China’s recent equity rally, with some drawing parallels with the events of 2015. In our view, however, the current surge is not driven by a single catalyst but is the product of multiple forces converging - policy adjustments, liquidity improvements, a thaw in US-China relations, and strengthening economic fundamentals all play pivotal roles.
In particular, the pivot in macro policy since September 2024 stands out. The People’s Bank of China (PBoC) has prioritised measures to bolster equity markets, including new structural monetary policy tools such as swap facility and relending to encourage long term investment into the stock markets. Notably, institutional investors have led the charge in A-share inflows during the first half of the year, which is a marked contrast to the retail-driven rally of 2015.
While the economy is still in the process of stabilising, key developments have fostered renewed confidence. The “DeepSeek moment” in early 2025, the emergence of new consumption patterns, combined with robust demand for Chinese exports and AI related investments, have restored investors’ confidence about China’s growth prospects. The extension of the US-China trade truce until early November offers additional breathing room, steadying immediate trade outlooks and supporting the credibility of this year’s growth targets. In response, recent economists’ surveys saw consensus GDP forecasts for 2025 have been raised close to the government’s target of 5.0%.
Domestic sentiment has also been buoyed by China’s resilience against tariff pressures. Onshore investors see the country gaining an edge in critical supply chain areas, with Chinese companies largely weathering external challenges. Meanwhile, the latest anti-involution campaign - echoing 2016’s capacity cuts but with distinct differences - has contributed to reflationary expectations. A mild rebound in credit impulse hints at possible improvements in Producer Price Index (PPI) and corporate profitability, though caution remains regarding the broader impacts of sectoral adjustments.
Looking ahead, two key channels will shape the real economy’s response. First, a revival in IPO (Initial Public Offering) momentum could reinforce a positive financing loop and enhance the transmission mechanism from financial market into supporting the real economy. Second, retail investor behaviour warrants close watch: while enthusiasm hasn’t matched that of a decade ago, momentum is building, with margin financing rising and household deposits potentially declining as more funds enter equities. This could foster a wealth effect, restoring household confidence and supporting discretionary spending. However, risks of crowding out property investment persist.
As China’s October National Day Holiday approaches, tourism spending and weekly property transaction data will provide critical early signals. Despite the market’s recent strength, H2 presents ongoing challenges, particularly as subsidies from the durable goods trade-in programme are scaled back, payback from tariff frontloading as well as property sector weakness. Investors and policymakers alike will need to remain alert to shifting dynamics to ensure continued stability and growth.
When it comes to the policy outlook, fiscal easing may still be the main policy lever. We see some room for more property sector easing if there are no signs of firmer stabilisation, as well as pivoting into welfare-related spending and expansion of the subsidy programmes. However, this may require additional fiscal resources to be used. The PBoC may face policy dilemmas in the coming quarters as it will need to balance between supporting the real economy and preventing any speculations or overheating in the stock market.
