Last week, Chinese stocks recorded their largest gain since 2015, a historic year that brings back memories not only of soaring valuations but also of a devastating crash. While the markets rejoiced in the rally, some experts warned investors not to let short-term exuberance overshadow the lessons of the past. Lu Ting, chief China economist at Nomura Holdings, expressed concern that current market conditions and investor sentiment on Chinese social media could lead to a repeat of the boom-and-bust cycle seen nearly a decade ago.
“Given the current market momentum and our tracking of sentiment on China’s social media, the risk of repeating the epic boom and bust in 2015 could rise rapidly in the coming weeks,” Lu cautioned. He added that in a worst-case scenario, the market could be headed for another crash. As global financial giants issue warnings and express cautious optimism, the world is watching closely to see how China’s government navigates these turbulent waters.
The surge in Chinese stocks last week evoked memories of 2015, a year that saw the Shanghai Stock Exchange collapse by nearly a third in just three weeks after a euphoric rally. What initially seemed like a market correction quickly spiraled into a full-blown financial crisis, prompting the Chinese government to intervene with drastic measures. Waves of state funds were funneled into the markets, trading in thousands of companies was suspended, and Beijing launched a massive marketing campaign encouraging citizens to buy stocks as an act of patriotism.
This aggressive response stabilized the market temporarily, but critics argued it violated Xi Jinping’s earlier pledge to let market forces play a “decisive” role in shaping economic policy. Ultimately, the rescue measures did little to address the root causes of the crash, namely the speculative bubble and structural issues within China’s economy.
The situation in 2024 is eerily similar. Although some investors are eager to ride the wave of gains, voices like Lu Ting’s are urging caution. His warning serves as a reminder that unchecked enthusiasm in financial markets can quickly lead to catastrophic outcomes.
Despite warnings from some quarters, not everyone is convinced that China is headed for another crash. Major financial institutions like Fidelity International and Goldman Sachs see potential in the mainland market. Goldman Sachs recently upgraded its outlook for Chinese stocks, predicting a 15-20% upside if Beijing follows through with promised stimulus measures.
Tim Moe, a strategist at Goldman Sachs, noted that recent policy moves by the Chinese government have reassured investors. These moves, which include interest rate cuts, reduced reserve requirements for banks, and slashed mortgage rates, signal that Beijing is taking steps to mitigate economic risks. According to Moe, these actions “have led the market to believe that policymakers have become more concerned about taking sufficient action to curtail left-tail growth risk.”
Similarly, BlackRock remains optimistic about Chinese shares. The firm recently reiterated its position that valuations in China are becoming increasingly attractive, especially when compared to developed markets. On October 1, BlackRock strategists wrote, “We see room to turn modestly overweight Chinese stocks in the near term,” citing favorable valuations.
While some investors remain bullish, others are more skeptical about the sustainability of the rally. Invesco, for instance, has warned that mainland shares might be “really overvalued,” suggesting that the current market euphoria is masking deeper structural problems. At the heart of these concerns is China’s ongoing property crisis, which has been a drag on the economy for nearly four years.
This property downturn, compounded by the economic damage from Covid-19 lockdowns, has led to rising local government debt and a broader risk of deflation. Some economists argue that without significant structural reforms, China is at risk of falling into a prolonged period of economic stagnation, similar to Japan’s “lost decades” following its own asset bubble in the 1990s.
Michael Pettis, a senior fellow at Carnegie China, believes that China’s current growth model is unsustainable. He argues that the country needs to shift away from an investment-driven economy toward a model that emphasizes household consumption. “Rebalancing” the economy, according to Pettis, is crucial to reversing decades of policies that have subsidized investment at the expense of household wealth.
Without such reforms, Pettis warns, “imbalances will continue to build,” meaning China could face the same challenges in the future, but with fewer resources to address them.
The question now facing Xi Jinping’s government is whether it will prioritize short-term stimulus measures or longer-term structural reforms. A week ago, the People’s Bank of China introduced a series of measures aimed at boosting market confidence. These included cutting borrowing costs, reducing banks’ reserve requirement ratios, and introducing new tools to support the stock market.
While these moves gave stocks a temporary boost, many experts argue that they do little to address China’s underlying economic challenges. “Treating the symptoms of China’s challenges with waves of liquidity is no substitute for supply-side reforms,” says Lu Ting. In his view, the Chinese government needs to focus on structural changes that will increase the competitiveness of the economy and reduce the risks of future boom-bust cycles.
Brad Setser, a senior fellow at the Council on Foreign Relations, agrees. He argues that China’s central government has the fiscal space to enact meaningful reforms but has been hesitant to do so. “The needed reforms to China’s central government center around freeing itself from the set of largely self-imposed constraints,” Setser says. These constraints have limited Beijing’s ability to address the country’s real estate crisis and declining household confidence.
Setser suggests that the government could use its fiscal space to ensure property developers fulfill their commitments or provide refunds to buyers. At the same time, Beijing could expand social safety nets, giving households more confidence to spend rather than save. Such measures would help China recover from its property downturn without relying heavily on exports.
Although Xi Jinping’s government has made several promises to boost innovation, support the private sector, and modernize the economy, the pace of implementation has been slow. This has left many investors questioning whether the Chinese leadership fully understands the urgency of the situation.
At July’s Third Plenum, Xi and Premier Li Qiang emphasized their commitment to “high-quality development” and “innovative vitality.” They pledged to champion the private sector and expand domestic demand. However, critics argue that these promises have not yet translated into concrete policy actions.
Belinda Schäpe, a China policy analyst at the Center for Research on Energy and Clean Air, notes that the Plenum communique marked the first time carbon reduction was explicitly mentioned as a priority. “This elevates China’s commitment to reducing emissions and tackling climate change to a new level,” Schäpe says. However, she adds that more action is needed to recalibrate China’s growth engines and reduce the dominance of inefficient state-owned enterprises.
As China’s stock market embarks on a new bull run, the stakes are higher than ever. Investors are closely watching how Beijing manages the latest surge in share prices and whether it can avoid the mistakes of 2015. While some analysts remain optimistic about China’s long-term prospects, others warn that the country’s economic model is in dire need of reform.
The Chinese government faces a delicate balancing act. On the one hand, it must support the stock market and prevent another crash. On the other, it must implement the structural changes needed to ensure sustainable growth. Failing to do so could lead to a repeat of past mistakes, with far-reaching consequences for both China and the global economy.
As Lu Ting notes, “While investors might still be OK to indulge in the boom for now, a more sober assessment is required.” Whether Beijing will take this advice to heart remains to be seen, but one thing is clear: this is a test China cannot afford to fail.
