China’s inventory market is booming, however the surge is the results of a slowing Chinese economy. With the actual property sector collapsing beneath huge debt and financial institution deposit charges beneath one p.c, buyers have been pushed into the inventory market because the only remaining option for his or her cash, fueling an enormous, debt-driven bubble.
Over the previous month, the Shanghai Composite Index climbed 7.7 p.c and is up 37.6 p.c from the identical time final yr, reaching its highest intraday degree since December 2021.
12 months-to-date, the index has gained about 15 p.c, whereas the broader CSI 300 is up 14 p.c and just lately hit a 37-month excessive. Collectively, the Shanghai Composite and CSI 300 have added greater than $1 trillion in market worth. In July alone, 1.96 million new A-share accounts had been opened, 71 p.c greater than a yr earlier, and new mutual fund issuances have surged 132 p.c.
Traditionally, Chinese language households poured their financial savings into property, however as that market implodes, capital is being redirected into equities and investments exterior of mainland China. Many buyers are shifting funds to Hong Kong, the place they’ve bought $78 billion value of Chinese language firm shares to date in 2025, already 75 p.c of final yr’s whole. Analysts count on the determine to succeed in $110 billion by yr’s finish.
China’s new inventory surge is being pushed by debt. Excellent margin trades hit a file 2.28 trillion yuan ($320 billion) on September 2, surpassing the earlier peak set in 2015. Margin financing rose from 1.8 trillion yuan in Might–June 2025 to 2.03 trillion yuan in August, a 13 p.c enhance in only a few months.
Within the quick time period, borrowing to take a position appears rational, as a result of inventory market returns are at present larger than the price of borrowing. However the result’s a harmful bubble. When inventory costs inevitably fall again to ranges constant with slowing growth and weak firm fundamentals, leveraged positions will unravel, buyers shall be unable to repay borrowed funds, and the market will face defaults and an enormous selloff.
Chinese language buyers have traditionally most popular actual property as a result of it’s tangible and fewer topic to distortion. Against this, the inventory market has lengthy been seen with mistrust, as it’s only partly free. Maybe 70 p.c of exercise is market-driven, however the CCP retains direct management and might intervene, even halting buying and selling throughout sell-offs.
Like bubbles elsewhere, margin buying and selling is amplifying the surge. Borrowing permits common buyers to extend their buying energy; as they purchase, costs rise, which attracts extra patrons, lots of whom additionally use margin. This suggestions loop fuels hypothesis and separates inventory costs from the basics of the underlying firms. Worry of being unnoticed accelerates the cycle, however the actuality is that fundamentals are deteriorating.
China’s financial system is slowing sharply. Commerce tensions with america, collapsing international direct funding, and waning export benefits have prompted many Western firms to cut back or go away China. Property funding has fallen 10.6 p.c, the steepest decline since information started in 1987. Property gross sales are down 12.9 p.c, new building begins have dropped 23 p.c, and international direct funding continues to fall. In the meantime, China is experiencing deflation for the primary time for the reason that 1998 Asian Monetary Disaster, with shopper costs flat, producer costs down for 34 consecutive months, and the GDP deflator anticipated to succeed in –0.2 p.c in 2025, in contrast with a pre-pandemic common of three.4 p.c.
For Western buyers, the outlook is determined by technique. These targeted on fundamentals are pulling cash out—hedge fund Bridgewater alone just lately withdrew about half a trillion {dollars} from Chinese language equities. Against this, aggressive market timers could also be tempted to trip the volatility, hoping to purchase earlier than the bubble bursts and promote at a revenue. Some international capital will chase short-term features, however the total development is capital flight.
This creates a coverage dilemma for Beijing. Extremely-low deposit charges have pushed financial savings away from productive funding and into speculative equities, producing malinvestment and capital construction distortions. Margin buying and selling has soared, making a temporal mismatch as short-term borrowing funds long-term fairness positions.
Stimulus measures designed to spur progress danger inflating the bubble additional, whereas efforts to chill hypothesis may set off the crash they hope to keep away from. The rally has given a false sense of safety, however the underlying circumstances, deflation, a property disaster, commerce tensions, and slowing progress, make this bubble much more fragile than previous expansions, and the systemic dangers a lot larger.
