China’s Stock Market Rally Gains Momentum Amid Policy Support
China’s stock market has experienced a significant rally in 2025, driven by advancements in artificial intelligence (AI), government initiatives to achieve chip self-sufficiency, and Beijing’s campaign to curb destructive price wars. The mainland CSI 300 index has climbed roughly 16% year-to-date, approaching its highest levels in over three years. Meanwhile, the CSI 300 Information Technology Index recently reached its peak since 2015, underscoring investor enthusiasm for tech stocks.
Retail Investors Propel Market Gains Despite Economic Headwinds
Retail investors have been pivotal in driving the market upwards, shifting funds from bank deposits into equities. According to HSBC data, retail traders comprise about 90% of daily trading volume in China’s onshore markets—a stark contrast to global exchanges like the New York Stock Exchange, where institutional investors dominate. Chinese households hold record savings exceeding 160 trillion yuan (approximately $22 trillion), yet only 5% of these savings are invested in equities. With declining deposit rates and an unfavorable property market, analysts see potential for further retail participation in stocks.
Market Momentum Outpaces Economic Fundamentals
“China’s ongoing equity rally appears disconnected with the economic fundamentals,” said Raymond Cheng, regional CIO for North Asia at Standard Chartered. “Retail investors have played a key role as they have been shifting some of their bank deposits into equity markets.”
Despite the rally, economic indicators paint a more cautious picture. Industrial output growth slowed to 5.2% in August, the weakest pace since August 2024, while retail sales rose 3.4% year-on-year—below expectations and a deceleration from July’s figures. Persistent weak domestic demand and efforts to reduce industrial overcapacity continue to challenge the economy.
Some market experts warn that while the overall market shows limited signs of overheating, certain segments—particularly technology stocks and contract research organizations (CROs)—are heating up rapidly, raising bubble concerns.
“This is not yet a bubble, but it is going that way,” stated Hao Hong, managing partner and CIO at Lotus Asset Management, emphasizing the risks in tech and pharma-related sectors.
Goldman Sachs notes that over $3 trillion in market capitalization has been added across Chinese and Hong Kong equities this year. However, Nomura cautions about excessive leverage and bubble risks amid economic slowdown signals in the second half of the year.
Signs of Stabilization in Strategic Sectors
Despite macroeconomic challenges, sectors such as AI, semiconductors, and renewables show signs of stabilization. Beijing’s policy to reduce cutthroat price competition, known as the “anti-involution” campaign, may bolster corporate earnings. For instance, Chinese chipmaker Cambricon reported a remarkable 4,000% year-over-year profit increase in the first half of 2025, reaching 2.88 billion yuan ($402.7 million). This highlights the growing momentum of China’s domestic semiconductor industry amid government support. However, analysts warn that technology sector valuations reflect highly optimistic expectations, which could leave the market vulnerable to corrections before earnings growth materializes.
FinOracleAI — Market View
China’s stock market rally in 2025 is underpinned by strong retail investor participation and government-driven structural initiatives, particularly in AI and semiconductor sectors. However, the disconnect between market momentum and economic fundamentals raises caution about sustainability.
- Opportunities: Expansion in AI and semiconductor industries supported by government policies; potential for increased retail investor engagement due to low deposit rates and limited real estate appeal.
- Risks: Overheated valuations in technology and CRO sectors; potential bubble formation fueled by speculative retail trading; economic slowdown dampening sustainable growth prospects.
Impact: The current market rally presents cautious optimism. While pockets of genuine innovation and government backing exist, investors should remain vigilant about valuation risks and economic headwinds that could prompt volatility or corrections.
