(Bloomberg) -- Chinese stocks jumped again on Monday, extending a liquidity-driven rally that’s now showing signs of euphoria in some corners of the market.

Coming off its best week since November, the benchmark CSI 300 Index climbed another 2.1%, with turnover on Shanghai and Shenzhen exchanges reaching a combined 3.1 trillion yuan ($433 billion) — the second highest on record. Technology shares continued to lead the charge, with stocks in the property sector also joining the broadening advance on evidence of more support measures.  

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Investors are betting that the rally has room to run further amid a capital rotation into equities, optimism over DeepSeek’s updated model, and expectations that authorities will keep sentiment supported before a military parade on Sept. 3. But with some key benchmarks now up more than 20% from this year’s low, signs of overheating have also started to emerge.

“The stock rally reflects abundant liquidity rather than improved fundamentals,” Macquarie Group economists including Larry Hu wrote in a Friday note. Under such conditions, investors are more willing to give “thematic plays the benefit of doubt” and liquidity indicators are key to watch, they said.

The latest good news came from the property front. Shanghai eased home-buying rules to contain the prolonged property crisis, allowing eligible residents to buy an unlimited number of homes in the outer suburbs. That lifted shares of some developers like China Vanke Co. by as much as 10%.

Any improvement in the real estate sector may help broaden a rally that has so far been led by growth stocks. Expectations that Beijing’s self-sufficiency drive will aid local chipmakers have fueled gains in recent sessions.

“We see the rally continuing on abundant domestic liquidity from deposit migration, fund issuance, and insurance fund buying,” HSBC Qianhai analysts led by Steven Sun wrote in a note. AI will remain a key investment theme, they said, upgrading their targets for Chinese benchmarks.

Big Disconnect

A rotation into equities by cash-rich investors has fueled the latest rebound. Over the past month alone, onshore stocks have added almost a trillion dollars to their market value, with the CSI 300 Index reaching a three-year high and the Shanghai Composite Index hitting levels not seen in a decade.

As the rally extends, there are growing signs of market dislocation and overheating. The disconnect with a still-weak economy is also spurring concerns that the euphoria may quickly cool once investors come to grips with the lack of fundamental support.

The 14-day relative strength index on the Shanghai Composite Index was at 88 on Monday, well above the 70-threshold that indicates shares are overbought.

The premium on the CPIC SSE STAR Chip Design Thematic ETF jumped to a record 6.2% on Friday, compared to an average of just 0.1% since the fund’s inception. The spike shows how investors have been bidding up the fund, taking prices above the value of its underlying assets. Premiums on the Penghua SSE STAR Chip ETF and the China Universal SSE Science and Technology Innovation Board 50 ETF also rose to above their long-term averages.

The premium dislocation is partly due to heavyweights such as Cambricon Technologies Corp. and Hygon Information Technology Co. jumping by their 20% limit on Friday — which restricted ETFs’ additional purchase of the stocks despite steady inflows into the funds. Both stocks were up by at least 11% on Monday.

“This shows a mismatch between the value and the price of some Star 50 stocks, and it’s unmistakable that many are overbought, so over the long term we will see a reversion to value,” Huang Huiming, fund manager at Nanjing Jing Heng Investment Management Co. “However, sentiment is the dominant factor, and it’s possible that these heated levels could remain for days.”

(Recasts throughout.)

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