The Shanghai Composite Index ended at its highest level since August 19, 2015, marking what could be described as a 10-year milestone. The total market capitalization of mainland China (Shanghai and Shenzhen) now stands at $13.93 trillion, with trading volumes well above the annual average.
How can this massive influx be explained, given that the latest economic data is showing signs of weakness?
Industrial production and retail sales in July slowed to their lowest levels since the end of 2023. Then, for the first time in 20 years, new yuan loans fell, contracting by 50 billion yuan (approximately $7 billion). Unemployment in major cities is also higher than expected.
Why are the markets ignoring these weak signals and redoubling their appetite for risk? Here's why.
Passive funds to the rescue
Because the truth is that not everything is so bleak. Chinese growth reached 5.3% in the first half of the year, with a solid second quarter above 5%. This is fully in line with the government's expectations before all the geopolitical turmoil of this year.
This relative optimism is reassuring foreign investors, who have seen an economy capable of weathering the real estate crisis in recent years and, more recently, doubts about its export model. In July, foreign capital inflows into Chinese equities reached $2.7 billion, up from $1.2 billion in June. Since the beginning of the year, $11 billion has been injected, compared with $7 billion for the whole of 2024.
Perceptions of the Chinese market are improving significantly. This trend is driven by confidence in the Chinese Communist Party's role in supporting innovation and managing economic imbalances.
Interventionism welcomed
Investors welcome the government's recent measures to contain the price war and industrial overcapacity. Two sectors symbolize the tensions: automotive and solar, where Beijing has been taking action for several weeks to regulate supply.
The belief that the state will intervene if things get out of hand is boosting confidence. Capital flows remain mostly domestic, although international investor confidence is valuable.
Asset rotation underway
Just as all roads lead to Rome, all investments eventually converge on the local stock market. Expected interventionism should continue to steer investors away from bonds. The Chinese 10-year bond yield fell from 1.79% at the start of the year to 1.59%. At this level, it makes sense to turn to local companies. Those capable of paying much higher yields are plentiful in China.
Real estate, meanwhile, is logically being shunned. Prices have been falling for 25 consecutive months.
Are we facing a market that ignores bad news and focuses only on the good? Perhaps. But this dynamic seems rational for now, even if it is based in part on default investment.
Since July, more than 200 mutual funds have been launched, 70% of which are invested in equities. These new vehicles have raised 67.7 billion yuan, according to the Shanghai Securities News.
Other potential drivers include household savings, which remain at staggering levels. They currently exceed the GDP of 2024. If Beijing manages to redirect some of these savings toward investment, the stock markets could benefit massively.
In the short term, the outlook is positive, with political support, sector rotation, and economic resilience. However, several analysts warn of a possible backlash in the medium term. Domestic policy and trade tensions with the US remain to be monitored closely. They could be major sources of disappointment.
