Is the Chinese Stock Market at an Inflection Point?
Summary:
- China’s stock market rally is unfolding against a backdrop of weak consumption, strained profitability, and cautious corporate earnings, and trade uncertainty.
- While favorable tailwinds such as cheap energy imports, strong gold reserves, and new trade partnerships offer support, headwinds from subdued domestic demand, regulatory pressure, and trade frictions remain significant.
- The divergence between rising stock prices and weaker underlying fundamentals suggests the rally may be fragile — sustained only if confidence improves or stimulus measures are expanded.
- China stands at a turning point where markets look forward, but the real economy has yet to catch up.
Strong Consumer, Weak Consumption:
The current Chinese economic climate is characterized by a strong consumer with a low confidence, and this spills into industrial output as weaker and more uncertain local and foreign market demand weighs on producers.
Household consumption in 2025 is 40% of GDP, despite the country having one of the highest savings rates in the world. The weakness is more pronounced when you look at the rates offered on savings and demand deposits.
Household Savings Deposits Rate for 1 year: 1.5%, and 2.75% for 3 years, whilst demand deposit yields 0.35%. Yet these low rates have not spurred consumers to spend.
Industrial activity has also been tepid in response as sentiments dwindle, (especially manufacturing and property market), however we've seen the stock markets rally, which the begs he question: is the rally justified?
Weak Consumer sentiment and regulations weighing on Profits:
Data on industrial production shows a struggle to comeback and the ManufacturingPMI numbers falling to 49.3, in July, below estimate and June figures signal an industrial struggle. However output has stayed above 5%
From the most recently reported earnings and financial results from major publicly traded Chinese companies, based on news published around August 27–29, 2025, companies in a wide array of sectors experienced profit declines despite revenue/output increases.
This reinforces the idea of a less confident consumer, and declining profitability from increased costs and lower prices emanating from weak domestic demand.
Notable Company Performance from the last release:
E-commerce sector, Alibaba saw a revenue miss, with sales coming in at 247 billion yuan compared to a forecasted 252.92 billion. Even though the Chinese consumer is strong and armed with trillions of dollars in savings, this drives concerns over consumer confidence and property woes and flat wage growth.
However net income came in spring seeing a 76% year-on-year increase, but these gains were mostly a result of investments from sale of Trendyol a Turkish E-commerce outfit.
BYD, an automotive/electric vehicles producer, saw a decline of -30% in Q2 net income, even with revenue growth at +14%, as gross margin slid to 16.3% from 18.7%, impacted by regulatory restrictions on supplier payment cycles and price-cutting norms.
Huawei has a similar revenue/profit growth story as it reported a decline of -32% in H1 net profits, but this is primarily due to substantial R&D investments targeting U.S. sanctions resilience. Revenue climbed 4% in the period.
For Oil and Gas, CNOOC also reported a decline in H1 profits to the time of 13% pressured by lower oil prices despite record production. Output however increase with oil and gas production rising 6% and natural gas 12%, as the company discovered new offshore fields and launched new projects home and abroad. This excerbated the decline in profit and thinning of the bottomline.
PDD Holdings also an E-commerce firm, beat earnings expectations in Q2, as investors weigh the sustainability of profits in the midst of ongoing investments.
Xpeng another EV manufacturer stands out as the bright spot as it saw both Revenue and gross margins improve with the former growing 125% year-on-year. Expectations and guidance points to a sustained momentum in Q3.
Ping An Insurance, saw a decline of -9% in H1 profits as investment income plummeted 30% due to losses on convertible bond assets.
Overall the Shanghai Index is at a 5 year high closing the week strong as well, but these earnings snapshot brings some concern as to the sustainability of the stock market rally and asks questions on if we are at or approaching a peak. Though continued positive growth is expected there remains some macroeconomic caution reflected in the earnings report of China Stocks on our watchlist (above).
Macroeconomic Caution:
Across sectors, from Consumer goods, to Financials and automobiles, weak consumer demand and China's broader economic climate continue to shape cautious outlooks.
If companies struggle to meet earnings in Q3, we could see a temporary pullback in stock prices in the following quarter (Q4), but it is inconceivable that we see a shift large enough to enact a market correction, seen as institutional investors are tilting away from bonds to more high yielding and higher risk assets.
If stock prices continue to outpace or diverge with industrial profits, it could lead to a major pullback, that can only be partially restored by economic stimulus.
Potential Tailwinds:
Oil: Cheap Russian Ruble denominated Oil, this is a tailwind for Oil consumer companies, but not necessarily for Oil and Gas production companies.
Stable Currency: Larger gold Holdings with the PBOC's hedge purchases coupled with increased De-dollarization if trade with its major [BRICS] trading partners, could stabilize the Yuan, and arm Beijing with monetary ammunition should they need to enact monetary stimulus.
This has been a major stabilizer in our view, seen as the currency paid USD/CNY has held above 6.9111 for the better part of the last 3 years. Coincidentally it was around that rime the PBOC started ramping up it's gold purchases.
This gives the PBOC monetary policy ammunition. As if there's anything we've learned in the last, it is that there is no limit to what the fiscal and monetary authorities would do to stabilise markets and the economy at large.
New Trade Ties: As Beijing coursts India for deeper economic ties given that both nations are under economic siege by the US on trade.
Further extension of the truce with the US come November 10, will also improve business sentiments.
Potential Headwinds:
Trade: Reduced access to the US market would greatly impact Chinese businesses dependent on US markets for either export or imports.
Weak Aggregate Demand (Consumption): China's economy probably has the highest savings rate amongst other developed and emerging market economies, but this translates to a relatively low propensity to consume.
Coupled with high unemployment you have a subdued aggregate demand and greater dependence on international markets leaving it more exposed to the ongoing protectionist wave.
Zero Equilibrium Notes and Remarks:
We continue to pay heed to the macroeconomic caution seen in the markets, but a bear market is ruled out for the year. This is barring a full blown trade war which could see exports dip further.
The property market woes still remain a major concern, but the financial sector is somewhat pacified by robust savings which could be deployed (at low rates) to industry.
The consumer goods sector is of the most worry to us as is the automobile sector which could face increasing pressure from European regulations or competition.
Technology and Telecommunications carry long-term value and growth potential, but are plagued by foreign competition, regulations, and protectionist policy targeting.
Consumer spending remains a key statistic to monitor in gauging industry book and market performance as well as related policies (eg anti-involution measures taken recently by the government.)
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