Macroscope | 4 reasons fears of China stock market bubble are misplaced

In early February 2024, China’s equity market looked like it was in terminal decline. The MSCI China Index, which tracks Chinese companies listed at home and abroad, was down more than 50 per cent from its February 2021 peak, while the CSI 300 Index of Shanghai- and Shenzhen-listed stocks had lost more than 40 per cent.

The combination of a cyclical and structural economic downturn, a protracted crisis in the housing market, Beijing’s cautious approach to deploying stimulus and the strong appeal of the technology-driven US equity market made “shorting”, or selling, Chinese stocks one of the most popular trades in markets. In its January 2024 Asia Fund Manager Survey, Bank of America noted that “chronic disappointment has turned investors away from Chinese equities”.

What a difference 18 months make. In Bank of America’s latest Asia Fund Manager Survey on August 12, China was the region’s second-most attractive stock market after Japan. The revival in Chinese equities’ fortunes is remarkable. Since September 11, 2024, the MSCI China and CSI 300 indexes are up 51 and 37 per cent, respectively. The tech-heavy ChiNext Index, meanwhile, is up 75 per cent.

In a report on August 8, Morgan Stanley noted that the MSCI China and Hong Kong’s Hang Seng Index were the world’s best-performing equity markets in the past year. Yet with onshore stocks adding almost US$1 trillion to their market value in the last month alone, doubts are creeping in about the sustainability of the rally. Some of the most important factors behind the long bear market in Chinese stocks – the pervasive weakness of domestic demand and the housing crisis – are still present.

The case for a disorderly correction in Chinese stocks hinges on whether the disconnect between persistently weak growth and rising equity prices becomes a key determinant of sentiment, dissuading investors from buying into the rally.