Veriton Investment

China’s $1.3 Trillion Stock Surge Intensifies Debate on Outlook

(Bloomberg) -- Chinese stocks capped another strong week of gains, intensifying a debate over the fate of a rally that’s defied the nation’s economic troubles to add $1.3 trillion in market value just this month.

Turnover for the onshore market climbed to a record this month as the benchmark CSI 300 Index gained for nine of the past 10 weeks. That’s despite words of caution from Chinese state media and moves by some brokerages and fund managers to cool things down.

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Bullish investors are expressing confidence that authorities will keep sentiment supported before the Sept. 3 military parade, which is set to mark the 80th anniversary of the end of World War II. China has a history of propping up its stock market ahead of major political events to project an image of stability. Bears, meanwhile, are pointing to overstretched technical indicators and high margin-financing levels.

“Animal spirits have burst out in China’s market, with traders piling into everything from chips to Labubu,” said Hebe Chen, an analyst at Vantage Markets in Melbourne. “The upcoming parade is fanning the frenzy, acting as a psychological safety net much like Chinese New Year or National Day, when authorities are expected to keep skies — and sentiment — clear.”

The relentless surge has also divided opinion among Wall Street strategists. Those at Goldman Sachs Group Inc. raised their CSI 300 target to flag a potential upside of about 10% over 12 months. They cited supportive valuations and favorable market positioning. A team at Morgan Stanley pointed to early signs of overheating, cautioning improving corporate fundamentals and stronger policy support are needed to sustain the rally.

“Normally, when we see divergent views we’re approaching a top. I think we may see a bit more market euphoria driven by a positive sentiment, but I don’t think it’s warranted in the longer term,” said Nick Twidale, chief analyst at ATFX Global Markets. “Investor appetite is still relatively strong but it could now turn swiftly and with it the market.”

Still mired in deflation and trade tensions, the stock boom this month that has added $1.3 trillion in onshore market’s value has caught many by surprise and spurred questions on the durability of the rally. Analysts have attributed the gains to rotation out of bonds in a low-yield environment onshore and enthusiasm around the chip sector inspired by DeepSeek’s new model.

In a sign of buoyant sentiment, artificial intelligence chip designer Cambricon Technologies Corp. rallied 110% this month alone, prompting the company to warn investors about trading risks. Its shares dived subsequently.

To be sure, the speed of the advance has been more measured compared with previous surges and there are few signs retail investors have been storming into the market in a rapid fashion.

For some, the bull run is still in its early stage.

“We are just at the beginning of a bull market. The long term logic behind it is the potential shift of household deposits amid a low-interest rate environment,” Niu Chunbao, fund manager at Shanghai Wanji Asset Management. “I think the bull market may continue for two years.”

--With assistance from April Ma and Mengchen Lu.