China's stock market outperforms global rivals

Chinese investors are driving the country's stock markets to grow strongly in 2025, even as international investors have been discouraged by years of underperformance and persistent deflationary pressures, according to an analysis published by the Financial Times (FT).

The benchmark CSI 300 index of mainland China's stock market stagnated in the first six months of this year but has posted double-digit gains since the end of June. Based on this momentum, the index has risen 14.3% since the start of the year, more than the main benchmarks in the US, Europe and Japan (in local currency terms).

The easing of trade tensions with the US has calmed investors in the region, but analysts say it is mainly low interest rates, bond yields near record lows and a lack of attractive alternatives that have led Chinese individual and institutional investors to turn to A-shares, traded on the country's onshore stock markets.

"Households and institutions in China don't have many options,” Shujin Chen, China economist and head of financial and real estate research at Jefferies, told the FT, adding: "A-shares have joined the "global party'.”

Stock markets in the US, Japan and Europe are trading at record highs as investors flock to stocks, defying warnings from many economists about the negative impact that US trade policy will have on global economic growth.

While still below its all-time high from China's post-Covid boom of 2021, the CSI 300's gain this year is close to the 14.7% gain seen in the full year of 2024, which followed three years of losses. Some analysts have pointed to Beijing's campaign against deflation as a major driver of the rise. Others are more cautious, saying the campaign will only lead to higher gains in some sectors. Bush Chu, a portfolio manager for China equities at Aberdeen, instead points to the amount of money circulating in China's financial system, partly as a result of loose monetary policy aimed at combating weak economic growth. He says: "The main reason is the easing of monetary policy since last year. Initially, we saw liquidity flowing into the bond market. But with the 10-year yield falling to an unattractive level and deposit rates falling, there are fewer options.”

• Hao Hong, Lotus Asset Management: "There is a lot of excess cash”

The "dying” state of China's real estate market, once a preferred investment option for households, has increased the amount of cash looking for assets to invest in and narrowed the range of options available.

"Households are no longer borrowing to buy properties, so there is a lot of excess cash in the system,” said Hao Hong, chief investment officer at Lotus Asset Management.

Despite the strong rise in A-shares, international investors have largely remained on the sidelines. For them, the weakness of the U.S. currency against the euro and yen this year has led to stronger dollar gains for European and Japanese stocks than for Chinese stocks.

"We haven't seen a significant impact from foreign capital flows,” said Vincent Che, head of equities at Ping An of China Asset Management in Hong Kong.

Domestic investors, however, have been in full force. In a sign of their enthusiasm, the volume of margin trading, in which investors borrow money to buy stocks, has surged 19 percent in the past two months to 2.2 trillion yuan ($308 billion). That's the highest level since 2015, when Chinese state media urged individual investors to buy stocks as part of the government's economic growth drive - only for the "rally” to end in a stock market crash.

But analysts said that since then, changes in the stock market structure and more precise government policies will prevent the worst excesses of that bubble from happening this time.

"It's very different,” says Kinger Lau, chief China equity strategist at Goldman Sachs, noting: "We're in a more moderate rally now.”

For example, the volume of margin trading relative to total market value is much lower than it was a decade ago.

"There's nothing about Chinese valuations that, to me, looks like they're in a bubble,” said Alexander Treves, an investment specialist at JPMorgan Asset Management.

Analysts say massive and coordinated stock purchases by Chinese funds and state-owned companies earlier this year helped set the stage for the current rally, signaling a bottom in asset prices. A policy last year that forced the country's insurance industry to buy more stocks also supported the market.

• Some foreign investors wary

China's market growth is happening even as persistent deflation threatens to erode corporate earnings. Factory-gate prices fell 3.6% in July on an annualized basis, falling every month since October 2022.

That has sparked caution among some foreign investors, who see better opportunities for earnings growth in markets like Japan, where bets that recent corporate governance reforms will pay off have pushed the Topix index to record highs.

"I would rather focus on an earnings-driven market,” said John Woods, chief investment officer for Asia at Lombard Odier.