As the Chinese stock market soars, many seasoned investors are taking a fresh look at the current rally. Just before the National Day holiday on September 30, the A-shares surged by nearly 300 points in a single day, with only 8 out of over 5,000 stocks declining. This rapid ascent from 2,700 to 3,300 points within a matter of days has sparked widespread discussions among market participants.
In an analysis, Manager Liu from Guotai Junan Securities highlighted interesting details behind this remarkable rally. He noted that, despite the market’s explosive growth, there has been no warning or cooling measures from regulatory authorities. In fact, state media reported the surge with a headline emphasizing the record-breaking turnover of over 2.6 trillion yuan, contributing to market sentiment. This marked the first time the national news broadcast addressed the A-share market since July 2020, suggesting an intention to boost investor confidence. Surprisingly, even the release of negative data indicating a year-on-year decrease of 17.8% in industrial profits didn’t dampen spirits; instead, it stimulated further gains.
Contrastingly, surrounding markets like Japan and South Korea experienced declines, leading some investors to speculate that foreign capital’s heightened interest in China could be a significant driver behind the A-share rally.
Despite the short-term strength of the market, some veteran traders, cautious after the 2015 stock market crash, are skeptical about the underpinnings of this rally. They argue that such rapid increases could lead to a chaotic aftermath, particularly given the lingering weaknesses in the economic fundamentals. The sustainability of any policy support for the market is yet to be seen.
Manager Liu pointed out that the September 26 meeting of the Central Politburo provided the policy context for the current upswing. The meeting emphasized the need to “boost the capital market” and “strongly guide long-term funds into the market,” along with support measures for mergers and acquisitions by listed companies, highlighting regulatory focus on the capital markets. However, he suggests that this rally is more of a “confidence bull market” driven by policy rather than fundamental economic growth. In the future, officials might leverage the stock market’s rise to help establish inflation expectations, potentially stimulating consumption and investment in an otherwise deflationary economic environment.
This implies that the rhythm of the current upswing should be approached with caution. As some investors have noted, the future trajectory of the stock market may hinge on whether this “confidence” can be sustained, especially for those still on the sidelines. While the rally may not be over, rising cautious sentiment is becoming increasingly evident.
