China’s stock boom will not do much to rejuvenate the economy, Nomura says
News Summary
Nomura Holdings states that the ongoing rally in Chinese stocks will do little to boost the mainland’s economic growth. Lu Ting, Nomura's chief China economist, highlighted that Chinese households primarily hold their wealth in the property market, accounting for 60% of total assets, while stock holdings represent only 1.3% (citing 2019 central bank data). Consequently, the wealth effect from rising stock prices is limited, and investors hoping for a bullish stock market to revive consumer spending and the broader economy are likely to be disappointed. Nomura had previously forecast a significant deterioration in China's growth in the second half of the year, attributed to the fading impact of a trade-in program for household appliances and high tariffs hurting exports.
Background
By mid-2025, China's stock market had experienced a two-month rally, with the Shanghai Composite Index reaching a decade high, primarily driven by a rotation of funds out of bank deposits and fixed-income products. However, the sustainability of this liquidity-driven boom is debated, with some fund managers and retail traders believing it will last with state support, while institutions like Nomura remain skeptical. Concurrently, in the broader global economic context, particularly under President Donald Trump's administration in the US, high tariffs on Chinese exports continue to exert pressure on China's trade sector. This compounds the economic challenges China faces, especially after key July economic data showed signs of a broad-based slowdown.
In-Depth AI Insights
Can the rally in Chinese stocks genuinely alleviate current economic downturn pressures? * Nomura's analysis directly challenges the traditional concept of a 'wealth effect,' highlighting that Chinese household assets are heavily concentrated in real estate, rendering the transmission mechanism from stock market gains to consumer spending very weak. * This suggests that any policy measures relying on stock market stimulus to boost domestic demand are likely to be ineffective, implying policymakers may need to pursue more direct and structural fiscal or monetary stimuli to support the economy. * For investors, this means the stock market performance should not be misinterpreted as a signal of improving economic fundamentals; the rally is more liquidity-driven than indicative of a healthy real economic recovery. Considering the current Trump administration's trade policies, what deeper structural challenges does the Chinese economy face? * The persistent high tariffs from the Trump administration, coupled with the diminishing returns of short-term stimulus measures like the 'appliance trade-in' program, expose inherent vulnerabilities in China's economic growth model. * China's over-reliance on export and investment-driven growth faces immense pressure to transform and upgrade amidst rising global trade protectionism. Finding new growth engines and expanding domestic demand are urgent priorities, but uneven household wealth distribution and weak consumer confidence are significant obstacles. * This external pressure may compel China to accelerate supply chain localization and technological self-reliance, which, in the short term, will increase the costs and uncertainties of economic adjustment. How should investors re-evaluate the risk-reward profile of Chinese assets? * Given the disconnect between the stock market and the real economy, and the ongoing pressure in the property market as the primary store of wealth, investors need to adopt a more cautious outlook on Chinese assets. * A liquidity-driven stock rally may exhibit significant volatility, and gains lacking fundamental support are unsustainable. Investors should be wary of short-term boosts and long-term risks potentially introduced by state-backed interventions. * Long-term opportunities might arise in sectors benefiting from structural reforms, technological self-sufficiency, and domestic consumption upgrades (e.g., advanced manufacturing, specific digital economy segments), but vigilance against policy uncertainty and geopolitical risks is crucial.