China’s Stock Market Surge: AI and Chips Drive a Powerful Rally — But Is a Bubble Brewing?
China’s stock market is on a powerful upswing, with the benchmark CSI 300 index climbing about 16% since the start of the year to near three-year highs. The rally has been powered by investor excitement over artificial intelligence, progress toward semiconductor self-sufficiency, and Beijing’s high-profile push to curb aggressive price wars among major industries. Tech stocks, in particular, have led the charge: the CSI 300 Information Technology Index recently hit its highest level since 2015, underscoring surging interest in Chinese innovation.
But the exuberance is stirring questions about sustainability. Analysts warn that much of the buying frenzy is being driven by retail traders rather than fundamentals, echoing the speculative booms of past decades. Raymond Cheng, regional CIO for North Asia at Standard Chartered, told reporters that “China’s ongoing equity rally appears disconnected from the economic fundamentals,” adding that savers are moving deposits into equities as interest rates fall and property becomes less attractive.
Retail investors dominate China’s onshore stock market — making up about 90% of daily trading volume compared with just 20%–25% in New York — which gives rallies a sharper edge. HSBC data show Chinese households now hold more than 160 trillion yuan ($22 trillion) in savings, yet only 5% is in equities. That leaves plenty of dry powder to keep markets buoyant even as corporate profits lag. However, analysts say this also heightens the risk of sharp reversals if sentiment sours or economic data disappoint.
Some sectors already appear overheated. Hao Hong, managing partner at Lotus Asset Management, called the current surge “not yet a bubble, but going that way,” highlighting contract research organizations and high-flying tech names as the riskiest corners. More than $3 trillion in market capitalization has been added across Chinese and Hong Kong stocks this year, according to Goldman Sachs, even as China’s macro indicators falter. Nomura has warned of excessive leverage and “potential bubbles” as growth slows and industrial output softens — August saw factory production ease to its weakest pace since August 2024 and retail sales miss forecasts at 3.4% growth.
Still, many investors remain optimistic. Semi-annual reports show stabilization in fast-growing sectors like AI, semiconductors, and renewables, while Beijing’s anti-innovation campaign could help improve profitability. Homegrown chipmaker Cambricon, for example, posted a more than 4,000% surge in first-half profit to 2.88 billion yuan ($402.7 million). J.P. Morgan strategist Chaoping Zhu cautions, however, that valuations may already reflect overly rosy expectations: “Momentum might be supported by hopes for structural improvements, but we haven’t yet seen a turnaround in macro fundamentals.” The question now is whether policy support and corporate earnings can catch up before the rally runs out of steam.
source: cnbc