China’s Market Frenzy: Will the Euphoria Last or Fade Quickly?

China’s stock market is undergoing a revival of historic proportions, driven by an unprecedented series of policy changes that have injected new vitality into an economy that has long been stagnant. In the final days of September 2024, a confluence of monetary easing, regulatory adjustments and fiscal stimulus orchestrated by Beijing unleashed a flood of capital, restoring approximately $1.8 trillion in value to the major stock exchanges. What was once a market burdened by structural challenges – ranging from the real estate slump to weakening consumer confidence and tight local government finances – has witnessed a sharp turnaround.

The market has been buoyed by what many see as a decisive shift against Beijing, creating widespread belief that China’s leadership is finally ready to intervene more aggressively. The rally of the Hang Seng Index, Shanghai Composite and CSI 300 was nothing short of spectacular and raised an important question: is this the start of a sustainable bull market, or just a temporary rise driven by sentiment and liquidity?

This dramatic turnaround was set in motion on September 24, when the People’s Bank of China (PBOC) has made a daring interventionfollowed just two days later by a surprise Politburo meeting. These two developments marked a clear break from recent economic management strategies, and indicated that Beijing was willing to deploy a broader range of instruments to stabilize markets and revive growth.

The PBOC’s actions set the tone with an aggressive easing package that included a reduction in the reserve requirement ratio (RRR) for commercial banks, reductions in mortgage rates on existing loans and new liquidity mechanisms aimed at supporting capital markets. The RRR cut alone is expected to inject around 1 trillion yuan ($141 billion) into the banking system, while the mortgage rate cuts are aimed at easing the financial burden on some 50 million households and thus boosting consumption . More specifically, the central bank introduced structural policies such as a 500 billion yuan facility to facilitate stock purchases by institutional investors – an unprecedented step aimed at stabilizing capital markets.

However, it was the Politburo meeting on September 26 that cemented the shift in sentiment. President Xi Jinping called for a comprehensive economic recovery and urged officials to support private businesses, ease financial distress among local governments and restore consumer confidence. This was a clear signal that Beijing had turned from its previous, more measured approach to a full-throttle effort to reignite economic momentum.

Xi’s unusually candid comments conveyed a sense of urgency and suggested the government was willing to take greater economic risks to reverse the current slowdown. For the markets, this was a defining moment – ​​one that marked the end of Beijing’s conservative approach in favor of a more proactive stance.

The market response was immediate and overwhelming. On September 30, the Hang Seng Index rose 2.4 percent, for a monthly gain of 17 percent – ​​the best performance since November 2022. At the same time, the Shanghai Composite Index rose 8.1 percent and the CSI 300 Index rose 8.5 percent. Each of these indexes is now in bull market territory, having risen more than 20 percent from recent lows.

This rally was marked not only by rising stock prices, but also by a notable increase in trading volumes. Combined sales in Shanghai and Shenzhen reached a record 2.6 trillion yuan ($370.6 billion), underscoring the wave of capital that has flooded the market.

These capital inflows, driven by both domestic retail investors and institutional funds, have fueled the upward momentum of the rally. Major financial institutions including UBS and Nomura have revised their year-end targets for major Chinese indices, reflecting growing confidence in Beijing’s policy pivot. The prevailing belief is that the sudden relaxation of controls on real estate markets, the easing of monetary policy and the immediate infusion of liquidity into the capital markets herald a decisive change in Chinese economic philosophy. The government once focused on reducing debt and curbing excess stimulus, but now appears to be prioritizing growth.

The crucial question now is whether this rally is the start of a sustainable recovery or just a temporary rise, driven by liquidity and market sentiment. At first glance, there are reasons for optimism. Analysts point to several structural factors that suggest the rally could continue, at least in the short term.

The first of these factors is the strong policy catalyst. Beijing’s commitment to achieving economic stability through fiscal and monetary measures provides continued support, especially for sectors such as infrastructure, construction equipment and steel, which are expected to benefit from government-led investment. Furthermore, China’s industrial strategy aims to drive technological innovation and renewable energy development – ​​industries such as AI-powered hardware, autonomous driving technologies and solid-state batteries are likely to play a central role in the country’s economic trajectory.

Patterns of capital inflows add another layer of optimism. Institutional investors, particularly through exchange-traded funds (ETFs) that track major Chinese indices such as the CSI 300 and A50, are positioning themselves for an extended market rally. The CSI 500 ETF, which covers mid-cap stocks, is also expected to attract significant interest, especially in growth sectors such as pharmaceuticals, advanced manufacturing and new energy.

Finally, external factors are providing favorable tailwinds for Chinese equities. The US Federal Reserve’s shift towards monetary easing has historically led to capital inflows into emerging markets, and China is no exception. As global liquidity increases, Chinese stocks, especially large-cap stocks in the manufacturing, commodities and technology sectors, are likely to attract renewed foreign interest. Global demand for industrial metals such as copper and aluminum – key raw materials in the manufacturing and renewable energy sectors – further supports this outlook.

Taken together, these developments indicate that the recent rally may be underpinned by deeper structural factors, with capital continuing to flow into key growth sectors, reinforcing the view that this rebound is more than a passing phenomenon. While there are reasons for optimism, the long-term trajectory of China’s stock market will depend on whether the government can address some deep-seated economic challenges.

The first and perhaps most pressing problem is policy continuity. While recent interventions have provided a short-term boost, continuing the rally will require sustained fiscal and structural reforms. The liquidity injections and interest rate cuts have eased some of the pressure on heavily indebted real estate companies and households, but do not address the deeper problems plaguing the Chinese economy.

The real estate sector remains a major risk. House prices in many cities are still falling and developers are burdened with significant debt. Without further reforms, a deterioration in the real estate market could easily wipe out equity market gains.

Moreover, broader macroeconomic fundamentals remain fragile. Industrial activity has continued to decline, with China’s official Purchasing Managers’ Index (PMI) contracting for the fifth straight month in September. This highlights the uneven nature of China’s recovery, with the gap between stock market performance and economic fundamentals widening. Without a broader revival of economic activity, the current rally could fizzle out.

Geopolitical risks are also high. The strategic rivalry between China and the US remains intense, and any further escalation of trade tensions or sanctions could undermine market sentiment. At the same time, a global economic slowdown – driven by inflationary pressures and tighter financial conditions – could weaken demand for Chinese exports, exacerbating the challenges facing China’s fragile recovery.

Comparisons with the Japanese stock market in the late 1980s are difficult to avoid. At the time, aggressive monetary policy fueled speculative growth, but the Japanese market collapsed as deeper structural problems, particularly in debt, remained unresolved. Similarly, the US Federal Reserve’s prolonged monetary easing following the 2008 financial crisis led to rapid asset inflation, but a real recovery only came after significant financial reforms.

China now stands at a similar crossroads. The stock market rally could be the first step towards a more sustainable recovery, but only if the government can implement longer-term structural corrections. For local governments, debt restructuring through special bonds or other fiscal instruments will be necessary to provide relief, but Beijing needs to fundamentally overhaul its fiscal-tax model to address the root causes of the debt crisis. Strengthening social safety nets and implementing hukou reforms will also be key to unlocking household spending and supporting long-term economic growth.

The real estate sector also requires continued attention. While Beijing’s recent measures have helped stabilize the market, further action is needed to avoid a prolonged downturn. The unsold housing stock must be absorbed, either through public housing programs or market-driven solutions, to restore liquidity to the sector and prevent a collapse in housing prices.

In conclusion, while the Chinese stock market has enjoyed a remarkable rebound, maintaining this momentum will require more than just short-term stimulus. The long-term success of this rally – and, by extension, China’s broader economic recovery – depends on Beijing’s ability to implement meaningful structural reforms. The coming months will reveal whether the recent policy shift can deliver a lasting economic turnaround or whether the current wave will prove transitory.