Will China’s liquidity-driven stock rally keep going?

Investing.com -- Chinese equities have staged a powerful summer rally, with A-share large and small caps up 8% and 10% since August, and H shares touching multi-year highs.

The upswing has come despite muted earnings revisions and signs of cyclical softness in macro data, raising questions about how sustainable the gains are.

According to Goldman Sachs, liquidity has been the primary driver, both in China and globally, and the bank expects the rally to extend further.

The strategists noted that while eight of the world’s ten largest equity markets are trading at or near record highs, Chinese shares remain 26–34% below their 2021 peaks, suggesting relative room for further gains.

Growth momentum has cooled since July, but with the official 5% GDP target in reach, Goldman strategists expect only a gradual slowdown.

Earnings revisions have stalled, though the bank keeps its forecast of 8–9% earnings per share (EPS) growth for 2025, higher than consensus for H shares but below A shares.

Valuations have reflated on the back of a series of policy signals, from last year’s regulatory pivot to the “DeepSeek Moment” that revived China’s AI narrative.

Investor sentiment and positioning suggest the rally is not yet overextended, strategists said. Retail margin financing has surged, but Goldman’s sentiment proxy indicates risk appetite is still below the peaks of 2015 and 2024.

“If retail risk appetite were to return to the 2024 and 2015 peaks, CSI300 would trade at 5180 and 5870 respectively (+18% and +34% vs current),” a team led by Kinger Lau said in a note.

Meanwhile, onshore mutual funds are only just lifting equity exposures, insurers remain well below their allocation caps, and foreign investors continue to run underweight positions.

Potential structural flows could also support equities. Goldman points to household excess savings of RMB55 trillion and a weak housing market as conditions that could drive reallocation into stocks.

Corporate reforms and lower real yields are further strengthening the case for equities relative to bonds and property.

The main risks are policy shocks, Goldman warns. The bank recalled that abrupt liquidity tightening, regulatory reversals, or macro policy disappointments have historically ended flow-driven rallies.

Still, the strategists believe the odds of a policy-engineered downturn are low, given the strategic role of markets in funding growth and boosting household wealth.

Goldman stays overweight China offshore and A shares, forecasting 10% 12-month returns for MSCI China and 12% for the CSI300, with a raised target of 4,900. But the bank also reiterated its alpha-over-beta bias, pointing to opportunities in TMT/Internet, consumer services, insurance, and materials as better risk-reward trades.

“History shows that such episodes can be rewarding if one times the market well, and the risk of not participating is equally high,” the strategists wrote.