Since mid-July of this year, China's stock market, or A-shares, has experienced a significant rebound. The Shanghai Composite Index has broken through the 3,800-point mark and is moving towards 3,850 amid fluctuations. Prior to this, there were comments suggesting that the 3,800-point level was not unattainable, and the sentiment of retail investors could shift from hesitation to fear of missing out. This has even led to some depositors actively transferring large-denomination certificates of deposit (CDs) to cash out and invest in stocks. A more significant increase has been observed in the Morgan Stanley Capital International (MSCI) Index. As of August 15, the MSCI China Index rose from 6,471.18 points at the end of last year to 8,354.78 points, marking a 29.1% increase year-to-date. This is notably higher than the 9.7% increase in the S&P 500 Index over the same period. At first glance, compared to the hot U.S. stock market, China's stock market seems to be showing even more promising growth.

Yet, the direction of China's stock market is seriously diverging from the macroeconomic situation.

First, after a period of continuous slowdown, fixed asset investment began to experience a rare year-on-year decline starting in June 2025. In the first quarter, the year-on-year growth was 4.2%. However, in April and May, the growth rate fell to 3.5% and 2.7%, respectively. By June, there was a year-on-year decline of 0.8%, and in July, it dropped further by 4.4%. The sales area and sales value of commercial housing both fell by 8.0% and 14.3%, respectively, with the declines expanding by 2.6 and 3.6 percentage points compared to the previous month. In various cities, both new and second-hand home prices continued to fall month-on-month. On average across 70 cities, new home prices fell 0.3% month-on-month, while second-hand home prices decreased by 0.5%. Year-on-year, these prices declined by 3.4% and 5.9%, respectively.

Analysts have pointed out that the shift from low-speed growth to a decline in fixed asset investment is influenced by several factors. One is the effect of the fiscal front-loading, which has led to a tapering off after an initial surge in government spending. Another factor is the comparative effect of the U.S. structural tariffs, which are higher for China than for other major economies. Under the impact of U.S. tariff policies, Chinese companies involved in the global supply chain are likely to shift their investments to regions with lower tariffs. The most significant factor, however, would be the result of oversupply and insufficient demand, which has exacerbated intense competition and prolonged deflation in China, leading to a continuous decline in investment returns.

Secondly, the growth rate of social consumption has also significantly slowed down, and the impact of the "old-for-new" policy on durable goods consumption is beginning to fade. In July, the total retail sales of consumer goods reached RMB 38,780 billion, a year-on-year increase of 3.7%. This was a sharp decline of 1.1 percentage points from the previous month's growth rate, marking the lowest growth rate of the year. Previously, sectors like cultural and office supplies, communication equipment, as well as home appliances, which had been boosted by the "old-for-new" subsidies and consumption vouchers, showed a noticeable decline. According to relevant analysts, this subsidy policy, aimed at high-priced, specific categories of goods, only encouraged consumers to bring forward their anticipated purchases to immediate consumption. It has not created or increased consumption in a sustainable way.

As a result, after the concentrated release of demand for durable goods, the subsequent drive for replacement has significantly weakened. The automotive market, in particular, has high price elasticity, with consumers being relatively sensitive to price changes. Once discounts or price reductions stop or weaken, demand shrinks rapidly. Moreover, the food and beverage (F&B) sector serves as a more accurate reflection of the current situation, where income growth is sluggish, and consumption is notably downgraded. In July, the year-on-year growth in F&B revenue dropped to just 1.1%, the lowest level since the pandemic, which has become a drag on overall consumption. The key composite indicator of consumer demand, i.e., the Consumer Price Index (CPI), showed a year-on-year growth rate of 0% in July, with the average decline of 0.1% over the first seven months of the year.

Third, the decline in domestic demand and the expected contraction in external demand have led to a slowdown in both the industrial and service sectors. In July, the industrial added value increased by 5.7% year-on-year, a decrease of 1.1 percentage points from the previous month, marking the lowest level since the autumn of last year. Furthermore, the production-to-sales ratio remains at a historically low point for the same period. Within the manufacturing sector, industries such as automobiles, non-ferrous metals, and coal, which have been key areas of tackling the intense competition, have seen a rapid decline in growth. Even the service sector, which has traditionally been more resilient, has started to show signs of slowdown. In July, the service sector production index grew by 5.8% year-on-year, down 0.2 percentage points from the previous month.

The key composite indicators measuring demand in the production sector, namely the Producer Purchase Price Index and the Producer Price Index, both declined year-on-year in July, by 4.5% and 3.6%, respectively. The former has been declining for 30 consecutive months, while the latter has fallen for 34 straight months. The production activities, which have long been supported by economic policies, will now face more challenges, including the impact of tariffs and efforts to curb the excessive competition in order to ease the pressures of price wars and deflation.

Additionally, the latest data shows that, although the decline has narrowed, profits for industrial enterprises above a designated size nationwide fell by 1.5% year-on-year in July, marking a third consecutive month of decline. Specifically, although the policies promoting large-scale equipment upgrades and consumer goods trade-ins have driven high growth in related sectors, and profits for private enterprises and small- and medium-sized businesses have improved, challenges still remain. In the consumer goods manufacturing sector, profits decreased by 4.7%, but the issue of insufficient demand has not been fundamentally alleviated. The mining and coal industries both experienced double-digit profit declines. Overall, both in terms of output value and profitability, industrial enterprises above the designated size have continued to show a weak performance.

Fourth, in terms of financial demand, both businesses and households have shown a significantly weak willingness to take out loans. Since the beginning of this year, aside from the strong performance of newly issued government bonds, net new loans have shown a negative growth for the first time in 20 years. This indicates that the demand for new debt from both businesses and households is notably low, with both corporate and consumer confidence remaining weak. The growth in the credit market is largely supported by government bond issuance alone.

In July 2019 and 2020, new loans to households amounted to RMB 516.5 billion and RMB 757.8 billion, respectively. After reaching a historical high in July 2020, new household loans sharply decreased to RMB 405.9 billion in July 2021. From July 2022, the decline became even more drastic, dropping to RMB 121.7 billion, and by 2023, the market shifted into net loan contraction. In July of that year, new household loans fell by RMB 200.7 billion, and in July 2024, the decrease widened to RMB 211.9 billion. In July 2025, the scale of the decline surged dramatically, reaching a reduction of RMB 490 billion.

From July 2021 to July 2025, new loans to enterprises and institutions amounted to RMB 433.4 billion, RMB 287.7 billion, RMB 237.8 billion, RMB 131.0 billion, and RMB 100.0 billion, respectively. In July 2022, this represented a year-on-year decline of 33.6%; in July 2023, a decline of 17.3%; in July 2024, a decline of 44.9%; and in July 2025, a decline of 23.6%. Compared to July five years ago, the loan demand from the enterprise sector has cumulatively dropped by 76.9%.

In terms of several key macroeconomic indicators, it can be argued that China's economy is still in the process of seeking to stabilize, which is not favorable news for the investment market. So, what is driving the significant growth in the stock market?

Analysts believe that the reason may lie in the fact that the central bank still hopes to stabilize the economy as soon as possible through continued monetary easing policies. This is similar to the government's expectation that, without changing income distribution or industrial policies, demand can be stimulated and supply-demand balance achieved solely through active fiscal policies. As a result, the People’s Bank of China continues to inject liquidity into the market far beyond what the economy requires. Additionally, following the recent announcement of a policy to tax bond interest income, a large amount of capital has flowed into the stock market, supporting a continued rise in stock prices despite the lack of macroeconomic fundamentals.

These analysts further point out that several factors have stimulated the stock market, including heightened expectations and confidence in future policy stimulus, as investors may interpret weak data as a signal for more economic measures; a temporary reduction in U.S.-China political risks due to an extended truce period; and Chinese retail investors' fear of missing out (FOMO) following the market rebound, leading to a surge in capital inflow. Recent trading data reveal that the turnover of the CSI 1000 Index has reached a three-year high, with daily turnover rates continuing to rise, and some individual stocks even experiencing consecutive trading halts. This suggests that signs of retail investors accelerating their market entry are beginning to surface.

In terms of the current macroeconomy, exports are essentially the only bright spot, but this may reverse in the second half of the year, as the "front-running" effect of foreign companies placing orders ahead of tariff imposition will dissipate. However, according to relevant analysts, this could actually have a short-term positive effect on the Chinese stock market, as it may prompt the government to ramp up stimulus measures, leading to more capital flowing into the stock market. As a result, many analysts from various institutions continue to recommend increasing holdings of Chinese stocks, and many institutions, including international capital, are indeed following this advice.

However, this lack of a sense of crisis among investors, or their highly speculative attitude toward the crisis, may lead the authorities to continue favoring a gradual stimulus approach, i.e., providing a bottom line without truly implementing substantial strategic changes to significantly boost the economy.

According to analysts, a gradual stimulus model is unlikely to drive a genuine stabilization and recovery of China's economy. The main reason is that its scale is insufficient to address the deep structural problems in the Chinese economy, and it cannot effectively boost demand or confidence. Specifically, the country is facing challenges such as high debt levels, the real estate crisis, overcapacity, and weak consumption. These issues require bold, large-scale interventions to resolve effectively, while a gradual stimulus typically only provides "baseline support”, such as small liquidity injections or partial policy adjustments, which cannot generate enough multiplier effects to stimulate economic growth. Moreover, this model may exacerbate inefficiencies in resource allocation, further increase leverage, and fail to fundamentally change the growth model, leading to continued economic stagnation without achieving a strong recovery.

From an economic theory perspective, stimulus policies belong to Keynesian measures. However, Keynesianism is a short-term demand management policy that emphasizes the need for timely and large-scale fiscal and monetary stimulus during economic recessions to break the vicious cycle and boost demand and confidence. In contrast, the gradual stimulus policy belongs to a long-term demand management paradigm characterized by a steady, ongoing approach, which is inherently full of logical contradictions. This model also overlooks the "lag effect" and "threshold effect" of the economy, meaning that gradual changes may exceed critical points and trigger nonlinear collapses, rather than reversing the trend through a sufficiently strong initial shock.

Additionally, analysts believe that the gradual stimulus policy often overlooks the far-reaching impact of policy changes on individual expectations when being evaluated. Market participants tend to predict future policy logic based on existing measures. If businesses perceive the stimulus as merely a "bottoming-out" support rather than a transformation, they will continue with conservative strategies and maintain an avoidance mentality. Businesses may refuse to proactively de-leverage, and local governments might also stubbornly rely on land-based financing, overall neglecting structural reforms. This could ultimately lead to a situation where accumulated issues become difficult to resolve, significantly weakening the effectiveness of the policy.

Final analysis conclusion:

For the current Chinese market, its strength is more driven by the combined forces of "liquidity and expectations" rather than the resonance of "profits and demand". While gradual stimulus has supported the market at the bottom, it has also been accumulating mismatches and leverage risks. Without a one-off, systematic policy package, the divergence between the stock market and the broader economy is unlikely to be sustained in the long term. It is worth noting that since the end of August, there have been several significant short-term corrections in the stock market index during specific trading sessions. Although the index has often recovered to high levels before the trading day ended, this process may reflect the cautious mindset of some investors.