China rally: From TINA to FOMO

Chinese stocks have been in a silent bull market for over a year already and are gradually attracting international interest again. Is it too late to jump aboard the bandwagon? Although Chinese equities are no longer extraordinarily cheap, stock-market history shows that Chinese (retail) investors are particularly susceptible to the “fear of missing out” and that bull markets often end in spectacular bubbles. This process is still in an early stage. There are enough catalysts in place for further share-price gains.

A flop in the long run

A glance at the Chinese equity market’s long-term chart provides a sober look at its historical performance for any investor seeking one – there wasn’t much to be earned here over the last ten years. This stands in stark contrast to the Chinese economy’s intermittently torrid growth rates, which have not been mirrored by similarly large profit increases by publicly traded Chinese companies. Fortunately, the investment experience wasn’t as wretched as a look at the standard indices suggests, or at least it wasn’t for talented stock pickers because China’s equity market, which is traditionally dominated by retail investors, is comparatively inefficient. Existing misvaluations harbor high alpha potential that has enabled good managers to earn 10 to 20 percentage points of excess returns in recent years. Since the trough point in spring 2024, the alpha element has now been joined by a positive broad-market component (beta) as well. The Shanghai Composite Index has gained around 30% year-to-date and is up by about 50% from its low point last year.

Little beta, lots of alpha | Investors haven’t earned anything with standard indices in the long run

MSCI China vs. MSCI World (in US dollars)

Sources: Bloomberg, Kaiser Partner Privatbank

What’s behind the rally?

As so often happens on financial markets, the current equity rally in China was immediately preceded by a capitulation by investors (and by government authorities) that led to, among other things, the ousting of the head of the country’s securities market regulator in February 2024. Ever since that price and sentiment low point on the Chinese stock market, a confluence of factors has converged to put a steady tailwind behind it. In September of last year, the government of China initiated a comprehensive, coordinated package of monetary, fiscal, and regulatory measures to regain the trust of the Chinese public and, in no small part, to put a floor under the country’s equity market. Since then, one can speak of a “Beijing put” that safeguards Chinese stocks from falling because a solid, upward-headed market is currently in the government’s interest. Late January then marked the arrival of DeepSeek – the astonishing capabilities of the Chinese chatbot put the US tech giants’ purported competitive edge into perspective, revealing that China is on a par with the USA in the field of artificial intelligence. A subsequent February meeting between President Xi Jinping and Chinese business executives was widely interpreted as a sign that Beijing’s tough regulatory crackdown on the private-sector economy would come to an end. Sentiment was also boosted by the relatively quick de-escalation of the trade war with the USA in late April and by the Chinese government’s “anti-involution” rhetoric aimed at curbing excessive, ruinous price competition in key sectors of industry.

Faith in the “Beijing put” has increased further in recent weeks. The government of China, for instance, announced subsidies for families with young children and plans to introduce free preschool education – highly symbolic steps aimed at spurring consumer spending. At the same time, Beijing approved a mega hydropower project in Tibet and authorized a gigantic new railway link between Xinjiang and Tibet with an estimated total budget of 1.7 trillion renminbi (equal to USD 240 billion). At the meeting of the State Council in mid-August, Prime Minister Li Qiang reiterated the need for “solid” measures to stimulate consumption and investment. Although hard macroeconomic data in China have come in rather mixed in recent months, the ongoing monetary and fiscal policy easing measures have already contributed to stabilizing GDP growth despite a sharp drop-off in exports to the USA and the persistent strain caused by China’s struggling real estate market. China’s credit impulse index, a key leading indicator of economic activity, has turned positive again in the meantime and is especially inspiring optimistic confidence.

With a tailwind | China’s government also wants a strong equity market

MSCI China index (in US dollars)

Sources: Bloomberg, Kaiser Partner Privatbank

What stage are we in?

The climate is very favorable for Chinese stocks at the moment, and the bull market is unlikely to end soon, in part because retail investors in China still have lots of idle cash stashed under their mattresses. That money could soon flow into the equity market because TINA (“there is no alternative”) exists also in China, perhaps even more so there than in the Western world. Extremely low interest rates and a collapsed housing market have made stocks the most attractive investment vehicle for Chinese households. Their savings rate has long been the world’s highest and has increased even further since the pandemic. Private households have begun in recent months to shift their deposits from banks to non-bank financial institutions. It’s a trend that may have much farther to run because households’ aggregate deposit holdings are still almost twice as large as the total combined market capitalization of listed domestic companies in China. Their deposit holdings were just as large in the year 2014 before the last spectacular stock boom. However, unlike at that time, interest rates today are much lower, which could drive stock prices even more forcefully. In the Chinese domestic stocks space in particular, which is dominated by retail investors, rising stock prices often take on a life of their own that is determined more by momentum and sentiment than by economic fundamentals. If TINA suddenly turns into FOMO (“fear of missing out”), a reappearance of irrational exuberance cannot be ruled out.

Looking at the fundamentals and investors’ positioning, quite a lot there also suggests that we are nowhere near the end of the rally yet. Despite the recent significant share-price advances, the MSCI China index is trading at a (2026) price-to-earnings multiple just shy of 13x, which is only slightly above the average for the last ten years. There is still a striking valuation discount, especially relative to developed-country markets. At the same time, Chinese corporate earnings soon look set to swing onto a cyclical recovery path and to grow at rates in a solid high-single-digit percent range. With regard to investor sentiment, in turn, although trading volume reached record levels in August, with more than two weeks of daily turnover exceeding 2 trillion renminbi, there have hardly been any signs of exaggerated risk appetite or speculative excesses thus far. And finally, individual private investors aren’t the only ones holding a lot of capital on the sidelines. Chinese equity funds and insurance companies so far are also only moderately invested in Chinese stocks. This is even truer for international investors, the majority of whom in recent years had written off China’s equity market as “uninvestable” and are just now gradually starting to show interest in it again.

Still a bargain? | Chinese stocks remain relatively cheap

Price-to-earnings ratio

Sources: Bloomberg, Kaiser Partner Privatbank

What could end the bull market?

So, the light is flashing green for China bulls. From a risk management perspective, though, there’s the question of what would turn the stock-market traffic light to amber or red. Stock-market history says that a bull market in Chinese equities usually ends under three conditions, none of which are in place at present:

• Speculative excess: Danger exists when speculative forces quickly take on epic proportions and valuations greatly exceed what the fundamentals warrant. For example, at their peak in 2007, domestic Chinese stocks traded at a valuation multiple of more than 70 times earnings. The mania in 2014/15, meanwhile, was driven by an explosion in debt-funded positions, the unwinding of which triggered a cascading stock-price meltdown. Valuations at the moment are in the normal range while market sentiment is anything but euphoric and the ratio of debt-funded positions to total market capitalization has hardly increased thus far. There is not enough speculative exuberance as of yet to cause the market to collapse under its own weight.
• Restrictive monetary and/or fiscal policy: The stock-market boom in 2007 imploded spectacularly after the People’s Bank of China (PBoC) aggressively raised interest rates. The market bubble in 2015 popped after regulatory authorities cracked down on investors’ debt-funded positions and took action to rein in margin lending by financial institutions. Today, in contrast, the “Beijing put” exists, as described above. Policymakers have an explicit goal of supporting prices on the equity market. Last year, the PBoC set up a swap facility to give non-bank financial institutions access to funding for investments in stocks. It also launched a special lending program that enables publicly traded companies and large shareholders to borrow money to fund stock buybacks. This policy is unlikely to change in the near future unless the burgeoning bull market escalates into another speculation craze.
• External shock: A severe external shock like the bursting of the technology bubble in the year 2000 or the 2008 financial crisis also can short-circuit a bull market. Trade War 1.0 between the USA and China in 2018 likewise triggered a large-scale selloff of Chinese stocks. This risk of a shock occurring really shouldn’t be underestimated and has to be constantly monitored. However, despite continual tit-for-tat provocations, the rivalry pendulum in USA-China relations has been inching more in the direction of de-escalation lately.

In view of the equity market’s increasing strategic importance for China’s economy with regard to the allocation of resources, the financing of new productive growth drivers, and the creation of prosperity and positive sentiment among Chinese households, the probability of a policy-induced downturn in stocks is low at the moment. However, anyone who would like to jump aboard the Chinese stock-market bandwagon should wait until the next dip because FOMO has never been a good investment advisor.