Beijing’s sweeping economic stimulus has sparked a powerful rally in Chinese stocks, sending the market soaring to levels not seen in nearly a decade. On September 30, the benchmark CSI 300 Index surged as much as 9.1%, marking the biggest one-day gain since 2015 and driving Chinese equities higher for the ninth consecutive day.
China’s stock market is now in the spotlight as investors, economists, and analysts worldwide debate whether the rally represents the start of a sustained resurgence or a temporary reaction to Beijing’s bold monetary policies. Among the optimists is Stephen Jen, the chief executive officer of Eurizon SLJ, who believes that Chinese equities remain “extremely undervalued” and poised for further growth. “Investors are so underweight on everything Chinese,” Jen says, “a serious rally is entirely possible.”
Beijing’s Aggressive Stimulus
Beijing’s recent moves to slash interest rates, relax homebuying rules, lower mortgage rates, and reduce the amount of cash banks must hold in reserve have had an immediate impact on market sentiment. Investors rushed back into Chinese equities as the People’s Bank of China (PBOC) signaled more stimulus to come. Last week, the PBOC cut the seven-day reverse repurchase rate from 1.7% to 1.5%, the largest reduction in years.
These actions come at a time when China’s economy faces considerable challenges. Growth has slowed in the wake of a faltering property market, declining global demand for exports, and the fallout from strict COVID-19 policies. In response, Beijing has unleashed a series of measures aimed at stabilizing the economy and restoring confidence in its financial markets.
“The combination of China’s aggressive stimulus and the US Federal Reserve’s easing, along with falling global oil prices, means Chinese risk assets ought to do very well,” Jen adds. He predicts that global equities, especially in China, will rally further toward the end of the year.
Not everyone shares Jen’s optimism. Stephen Roach, a prominent economist and former Asia-region chairman for Morgan Stanley, remains skeptical about China’s economic future. Roach has long warned that China risks falling into a “Japanese-like quagmire”—a situation in which economic growth stagnates, and deflation sets in, as a result of a debt-fueled asset bubble.
While Beijing’s stimulus measures may provide a short-term boost, Roach worries that they do little to address the structural issues that have long plagued China’s economy. These include the troubled property market, local governments’ deteriorating balance sheets, and a lack of clear progress in transitioning China’s growth model from exports and investment to services and domestic consumption. “With the Politburo sending an emergency message of more stimulus to come, is China’s long economic nightmare now over?” Roach asks. “If only it were that easy.”
Bulls vs. Bears on China
The current market rally reflects a sharp divide among investors. Many who had previously shorted China’s stock market are now reversing their positions, spurred on by the wave of stimulus measures. Earlier this month, Bank of America Corp. found that short positions in Chinese equities were among the most crowded trades globally. Yet, as China’s stock market rebounds, the skeptics—led by Roach—remain unconvinced.
One of the key concerns is that while Beijing is pulling all the monetary levers at its disposal, it has yet to roll out significant fiscal measures that could provide the foundation for long-term recovery. Zhiwei Zhang, chief economist at Pinpoint Asset Management, echoes these concerns, emphasizing that fiscal policy will be essential to addressing the broader macroeconomic challenges China faces. “The key policy to address the macro challenge remains to be fiscal,” Zhang says, reflecting a common view among economists who believe that government spending will be necessary to drive sustainable growth.
A major focus of Beijing’s stimulus efforts has been the real estate sector, which has been in a state of turmoil for several years. The collapse of several major property developers, including Evergrande, exposed the sector’s unsustainable debt levels and triggered fears of a wider financial crisis.
In its latest round of stimulus, the Politburo pledged to stop the decline in the property market, but the measures announced so far—such as cuts in mortgage rates and downpayment requirements—have been criticized as insufficient. Roach points out that there has been “a notable lack of detail” regarding how Beijing plans to deal with the overhang of unsold homes and convert these properties into low-income housing, a critical issue that has yet to be addressed.
More concerning, economists say, is the lack of progress in bolstering household demand. China’s economy has long relied on exports and investment for growth, but with global demand slowing, the need to stimulate domestic consumption has become more urgent. Yet Chinese households, burdened by high levels of debt and economic uncertainty, remain reluctant to spend.
China’s economic recovery is also vulnerable to risks from abroad. The prospect of Japan raising interest rates to their highest levels since 2008 poses a threat to Chinese exports, while the US economy, showing signs of strain ahead of a contentious presidential election, could lead to further trade tensions.
Both Democrats and Republicans have signaled their intent to impose new tariffs on Chinese goods, threatening China’s access to one of its largest markets. This could further complicate Beijing’s efforts to stimulate its export-driven economy and shift the growth model towards services and domestic consumption.
Stimulus vs. Structural Reforms
While the immediate impact of China’s stimulus blitz has been positive, the longer-term sustainability of the rally will depend on Beijing’s ability to implement deeper structural reforms. Economists agree that China needs to do more than just inject liquidity into its financial system to secure lasting economic growth.
One of the key challenges is reducing the dominance of state-owned enterprises (SOEs) to make room for private companies, particularly small and medium-sized enterprises (SMEs), which are essential for innovation and job creation. However, despite pledges to reform the SOE sector, little progress has been made on this front.
Global investors are also closely watching how Beijing handles its crackdown on the technology sector, which has left some of China’s largest tech companies, including Alibaba and Tencent, in a state of uncertainty. Clearer signals from the government about the future of these companies could help restore confidence among foreign investors.
For now, the general consensus is that the stimulus floodgates have been opened. The PBOC’s recent announcement of a new 500 billion yuan ($71 billion) equity swap facility, which can be tapped by financial institutions to buy stocks, underscores the government’s commitment to stabilizing the market. In addition, the creation of a 300 billion yuan ($42 billion) lending facility for listed companies to buy back shares has further fueled optimism among investors. Goldman Sachs analysts have taken note, writing in a recent report: “We believe the persistent growth weakness has hit policymakers’ pain threshold, and the policy put has been triggered.”
Yet as Roach and others caution, the sustainability of the rally will depend on Beijing’s ability to couple its monetary stimulus with meaningful supply-side reforms. Without these, there is a risk that China could face the same fate as Japan, which struggled with decades of low growth and deflation following the collapse of its asset bubble in the 1990s.
Roach remains concerned that China’s debt-to-GDP ratio, which reached 85% in early 2024, could limit the government’s ability to deploy large-scale fiscal stimulus, similar to the package it implemented in 2009 following the global financial crisis.
China’s stock market rally, fueled by aggressive stimulus measures, has injected fresh optimism into the country’s economic outlook. However, the divide between bulls like Stephen Jen and skeptics like Stephen Roach highlights the uncertainty surrounding China’s long-term recovery.
As Beijing continues to roll out monetary measures to stabilize the market, attention will increasingly turn to the government’s ability to address deeper structural issues. Whether China can recalibrate its growth model, bolster domestic consumption, and reform its property and financial sectors will determine whether the current rally is the beginning of a sustainable recovery—or just a temporary respite in a longer-term slowdown. The world will be watching as President Xi Jinping’s government navigates these challenges in the months and years to come.
