Investors will speak on the stock exchange in Hangzhou, Z Jiang Province, China on February 3, 2017.
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China’s stock market saw rapid rally this year, as a step aimed at advancement in artificial intelligence, a step aimed at gaining self-sufficiency in chips, and a campaign to curb the optimism of Price Wars fuel investors.
However, as retail investors push the market higher and the Bulls support liquidity and policy, some experts have questioned whether the market is in bubble territory.
The mainland’s CSI 300 index has risen by about 16% since the start of the year, hovering near a high of more than three years. The CSI 300 Information Technology Index, which measures the performance of high-tech companies within the CSI 300, reached its highest level last week since 2015.
“China’s ongoing stock gatherings appear to be disconnected from the economic foundation,” said Raymond Chen, a regional CIO in North Asia, Standard Chartered, and “retail investors have played a key role as they have turned some of their bank deposits into stock markets.”
Retail investors dominate China’s land stock market, accounting for around 90% of daily trading, according to data from HSBC. This contrasts with the major global exchanges where the institutions lead their activities. For example, on the New York Stock Exchange, individual investors make up only 20% to 25% of the volume of trading.
According to HSBC, total savings in Chinese households currently stand at 160 trillion yuan ($22 trillion), a record high. However, only 5% is allocated to stocks. This means there is room for retail participation, especially as deposit rates drop and property remains favorable, analysts told CNBC.
Basics vs. momentum
“The fundamentals don’t support momentum well, but the market is always leading the foundation,” said Hao Hong, managing partner and CIO at Lotus Asset Management. “There are few signs of overheating across the market, but the market pockets are a little too hot.”
“This isn’t a bubble yet, but it’s going that way,” Hong said. He pointed out contract research institutes (companies that provide research and development services to Pharma, Biotech, Medical Device Companies), and technology names as the most risky segments, but stopped labeling them as bubbles.
According to Goldman Sachs, stocks in China and Hong Kong have been added to market capitalization of more than $3 trillion this year. However, China’s economic data has little confirmation that authentic, sustainable rebounds are ongoing, Marketwatcher said.
Japanese financial holding company NOMURA warned last month of excessive leverage and potential “bubble” as the stock market continues to surge, despite the Chinese economy showing signs of sputtering later this year.
China’s economic slowdown worsened in August as a set of key indicators failed to meet expectations. Production has heavier production in its efforts to reduce sustained weak domestic demand and industry overcapacity.
Industrial output rose 5.2% last month, easing from a 5.7% growth in July, marking its weakest pace since August 2024. Retail sales increased 3.4% year-on-year.
“We have not seen any signs of a macro-finals turnaround so far, but the current momentum may be driven by expectations for structural improvements in the economy,” said Chaoping Zhu, global market strategist at JP Morgan Asset Management.
Semi-annual reports suggest that stabilization in sectors such as AI, semiconductors, and renewable energy, as well as Beijing’s “anti-volution” push (to curb a price war) can improve companies’ profitability.
For example, Chinese chip maker Kamblikong reported record profits in the first half, jumping over 4,000% annually to 2.888 billion yuan ($402.7 million) in the first six months, highlighting the rise in momentum of domestic chip companies as Beijing strengthens its ancestral semiconductor sector.
Still, Zhu warns that the ratings of the technology may be “priceeded with very optimistic expectations,” leaving it vulnerable to pulling back the market before revenues catch up.
