China’s Stock Market Rally Gains Momentum Despite Economic Headwinds

China’s stock markets are witnessing a powerful rally, buoyed largely by state-backed funds and institutional investors, even as the broader economy continues to grapple with sluggish growth, a prolonged property crisis, and deflationary pressures.

The Shanghai Composite Index has surged nearly 25% since April, reaching decade-high levels. Analysts say the absence of widespread retail investor frenzy suggests that the rally may have further room to run.

“Stocks can rise even in a slowing economy as fresh inflows lift valuations,” said Chen Haoyang, a Shanghai-based fund manager at Leader Capital. “The money-making effect is only just beginning. The mood isn’t overheated yet, so there is still space to be more daring.”

Household Savings Begin to Shift

Chinese households, sitting on a record 160 trillion yuan ($22.3 trillion) in savings—triple the amount from a decade ago—are beginning to move money out of low-yielding bank deposits and into financial markets. In July alone, individual deposits fell by 1.1 trillion yuan, while deposits in non-banking financial institutions rose by 2.1 trillion yuan.

“With interest rates falling, clients are shifting money away from deposits and bonds toward stocks,” said Max Gu of Citic Securities. Analysts estimate that trillions of yuan in maturing retail deposits could flow into equities over the coming year.

The shift is further supported by higher stock market returns: the CSI 300 Index currently offers a dividend yield of around 2.5%, compared with less than 1% for one-year bank deposits and roughly 1.7% for 10-year government bonds.

Echoes of 2015, but Key Differences

The boom has drawn comparisons with the 2015 stock market surge that ended in a spectacular crash. However, analysts stress that this rally is structurally different. Instead of being driven by leveraged retail investors, as was the case a decade ago, the current upswing is underpinned by long-term institutional funds, sovereign support, and confidence in emerging sectors such as artificial intelligence.

“Unlike 2015, today’s rally is more resilient because it is supported by institutional money rather than speculative borrowing,” Nomura analysts said, noting that margin financing still accounts for just 2.2% of China’s floating market capitalization—half the level seen during the 2015 boom.

Policy Balancing Act

China’s policymakers now face a delicate challenge. Rolling out aggressive stimulus could fuel economic recovery but risks inflating a stock market bubble. Conversely, staying cautious may deepen the ongoing slowdown.

Daily trading turnover on Chinese bourses has exceeded 2 trillion yuan for 11 consecutive sessions—the longest streak on record. Meanwhile, 1.9 million new retail trading accounts were opened in July, far fewer than the 7 million monthly accounts created during the 2015 surge, suggesting investor sentiment remains measured.

“Looking at 2025 alone, the picture is exciting,” said Homin Lee, strategist at Lombard Odier. “But over the longer horizon, Chinese equities have been a difficult investment for many.”