China’s stock market is booming, but the surge is the result of a slowing Chinese economy. With the real estate sector collapsing under massive debt and bank deposit rates below one percent, investors have been pushed into the stock market as the only remaining option for their money, fueling a massive, debt-driven bubble.
Over the past month, the Shanghai Composite Index climbed 7.7 percent and is up 37.6 percent from the same time last year, reaching its highest intraday level since December 2021.
Year-to-date, the index has gained about 15 percent, while the broader CSI 300 is up 14 percent and recently hit a 37-month high. Together, the Shanghai Composite and CSI 300 have added more than $1 trillion in market value. In July alone, 1.96 million new A-share accounts were opened, 71 percent more than a year earlier, and new mutual fund issuances have surged 132 percent.
Historically, Chinese households poured their savings into property, but as that market implodes, capital is being redirected into equities and investments outside of mainland China. Many investors are shifting funds to Hong Kong, where they have purchased $78 billion worth of Chinese company shares so far in 2025, already 75 percent of last year’s total. Analysts expect the figure to reach $110 billion by year’s end.
China’s new stock surge is being driven by debt. Outstanding margin trades hit a record 2.28 trillion yuan ($320 billion) on September 2, surpassing the previous peak set in 2015. Margin financing rose from 1.8 trillion yuan in May–June 2025 to 2.03 trillion yuan in August, a 13 percent increase in just a few months.
In the short term, borrowing to invest seems rational, because stock market returns are currently greater than the cost of borrowing. But the result is a dangerous bubble. When stock prices inevitably fall back to levels consistent with slowing growth and weak company fundamentals, leveraged positions will unravel, investors will be unable to repay borrowed funds, and the market will face defaults and a massive selloff.
Chinese investors have historically preferred real estate because it is tangible and less subject to distortion. By contrast, the stock market has long been viewed with distrust, as it is only partly free. Perhaps 70 percent of activity is market-driven, but the CCP retains direct control and can intervene, even halting trading during sell-offs.
Like bubbles elsewhere, margin trading is amplifying the surge. Borrowing allows average investors to increase their purchasing power; as they buy, prices rise, which attracts more buyers, many of whom also use margin. This feedback loop fuels speculation and separates stock prices from the fundamentals of the underlying companies. Fear of being left out accelerates the cycle, but the reality is that fundamentals are deteriorating.
China’s economy is slowing sharply. Trade tensions with the United States, collapsing foreign direct investment, and waning export advantages have caused many Western companies to scale back or leave China. Property investment has fallen 10.6 percent, the steepest decline since records began in 1987. Property sales are down 12.9 percent, new construction starts have dropped 23 percent, and foreign direct investment continues to fall. Meanwhile, China is experiencing deflation for the first time since the 1998 Asian Financial Crisis, with consumer prices flat, producer prices down for 34 consecutive months, and the GDP deflator expected to reach –0.2 percent in 2025, compared with a pre-pandemic average of 3.4 percent.
For Western investors, the outlook depends on strategy. Those focused on fundamentals are pulling money out—hedge fund Bridgewater alone recently withdrew about half a trillion dollars from Chinese equities. By contrast, aggressive market timers may be tempted to ride the volatility, hoping to buy before the bubble bursts and sell at a profit. Some foreign capital will chase short-term gains, but the overall trend is capital flight.
This creates a policy dilemma for Beijing. Ultra-low deposit rates have pushed savings away from productive investment and into speculative equities, producing malinvestment and capital structure distortions. Margin trading has soared, creating a temporal mismatch as short-term borrowing finances long-term equity positions.
Stimulus measures designed to spur growth risk inflating the bubble further, while efforts to cool speculation could trigger the crash they hope to avoid. The rally has given a false sense of security, but the underlying conditions, deflation, a property crisis, trade tensions, and slowing growth, make this bubble far more fragile than past expansions, and the systemic risks much greater.
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