Bubble Risks Grow as China’s Stock Bull Run Defies Economic Rules

China’s economy is struggling under the weight of tariffs and a deep-rooted property crisis, yet its stock market is extending a bull run — a disconnect raising doubts about the rally’s sustainability, Bloomberg News reported.

The rally has been driven largely by cash-rich investors shifting into equities amid a lack of alternatives. (Photo: Shanghai Stock Exchange LinkedIn)

In the past month alone, onshore stocks have gained nearly $1 trillion in market value, the Shanghai Composite Index has hit a decade high, and the CSI 300 Index has climbed more than 20% from this year’s low.

This surge comes even as economic indicators — from consumption and home prices to inflation — continue to flash red for investors.

The rally has been driven largely by cash-rich investors shifting into equities amid a lack of alternatives. While the market’s steady advance may reduce the risk of a sudden correction, some analysts warn a bubble is forming.

Nomura Holdings Inc. has cautioned against “irrational exuberance,” while TS Lombard has described the rally as a standoff between “market bulls and macro bears.”

Homin Lee of Lombard Odier Ltd. in Singapore said: “Markets might be expecting, either correctly or incorrectly, that macroeconomic fundamentals will improve. But a bull market will not be sustainable if inflation remains close to 0% and corporate pricing power faces severe headwinds from weak domestic demand.”

A deflationary spiral that has eroded corporate pricing power in the world’s second-largest economy remains one of the biggest reasons to question the sustainability of the current rally.