By Jules Rimmer
Technical factors are combining with fundamentals, says Gavekal analyst
China’s stock market has rallied roughly 60% since its massive stimulus package was announced in the last week of September 2024
The steady but strong gains for Chinese stocks since it announced stimulus last year may soon lead to an acceleration, one strategist argues.
Since the Chinese government stunned markets in September 2024 with the scale and scope of its stimulus package, Chinese equities CN:SHCOMP in local terms have surged about 40%, as the iShares MSCI China MCHI for U.S.-based investors has rallied over 60%.
A combination of specific liquidity conditions and technical factors are conspiring, however, to boost the prospects for an even sharper rally, according to Thomas Gatley, the Chinese strategist at Hong Kong-headquartered research and wealth management boutique Gavekal.
And the spark to set it off may be any easing in Sino-American tensions when U.S. President Donald Trump and China President Xi Jinping meet in Seoul at the end of the month, he says.
But that is simply the match to what are fertile conditions.
This is the sixth mega-rally in China’s equity market history.
What persuades him of China’s upside potential at present are favorable liquidity conditions. Public equity fund issuance remains very subdued, something like 30 billion renminbi ($4.2 billion) per month at present versus 50 billion renminbi in 2021 for instance, and so whereas in the past this source of supply might have drained funds from the market, it isn’t right now.
Secondary equity issuance through private placements has rebounded more sharply but often in the largest state banks where most has been absorbed by the Ministry of Finance and state-owned enterprises. Gatley draws a distinction between primary issuance, where investors sell existing positions to reinvest in initial public offerings that usually gap up on their debut, and secondary, where they don’t.
Net liquidity conditions at present are favorable by historical standards
With a rising market but without this supply, traders have increased their reactivity into what Gatley calls a “trading frenzy.” Onshore trading volume in China is now averaging 3 trillion renminbi daily, “about twice as much as in the U.S., despite a market capitalization five times smaller.” Gatley adds.
While the Chinese authorities would prefer to attract long-term investors, there’s not much evidence this has materialized yet. China’s households have around 162 trillion renminbi in bank deposits versus a total stock market capitalization of 100 trillion renminbi. American households, in contrast, have $10 trillion of deposits but a stock market worth $70 trillion.
The ten biggest exchange-traded funds listed domestically report assets under management up 54% in the last twelve months which, given a 60% rally in the market, suggests institutional investors have yet to make their presence truly felt.
This is an important source of potential demand, Gatley says. These funds tend to have “stickier money” than retail investors.
While government stimulus set off the gains last year, China now boasts an AI narrative of its own. The AI story, combined with a government campaign to reduce cut-throat competition, offers some fundamental justification for higher share prices.
-Jules Rimmer
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10-07-25 0735ET
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