The Shanghai Composite Index reached its historical high of 6124.04 on October 16, 2007, eighteen years ago. While watching the nearly 20-year bull market in the US, Chinese stock investors eagerly awaited a long-term bull market in the China A-shares market. Those young people who bravely entered the market back then are now gray-haired. Now, the Chinese stock market has gathered five trump cards, potentially propelling this bull market to a new historical high.
1. Lower Interest Rates – Highlighting the Value of the Stock Market
The yield on China's 10-year government bonds is 1.9%, while the average dividend yield of 2.5% for the CSI 300 Index exceeds the yield of long-term government bonds. On average, listed companies distribute only 35% of their net profits as dividends, with the bulk of the profits remaining within the company.
Comparing to the annualized return of bank wealth management products at 1.5% and the one-year deposit rate at 0.95%, stocks have become very attractive.
In contrast to the US stock market, the S&P 500 Index has a PE ratio of 25, a dividend yield of 1.2%, and a 4.14% yield on 10-year US Treasury bonds. The US currently has higher interest rates, more than doubling that of China, with a dividend yield 50% lower and a P/E ratio 70% higher than CSI300 Index. Chinese stocks offer better value than US stocks.
2. Capital Overflow – Large Amounts of Capital Lacking Investment Opportunities
Over the past two decades, the property market absorbed the largest share of investments. However, with housing prices peaked and declining, the real estate sector cannot attract investments like before. Correspondingly, real estate trust products have also dwindled. In the past few years, RMB 50 trillion of excess savings have been accumulated, with household savings deposits reaching RMB 162 trillion. Previously, excess savings could be absorbed through the real estate market and property related debt products, but now both channels are not viable. Now the largest channel available for absorbing investment capital is the stock market.
When the stock market offers a profit-making effect creating good holding experience of equities, capital will flock in. Every bull market follows this pattern. What attracts institutional investors to the market are stock valuations and company performance. The key to attract individual investors to the market is the holding experience. When holdings yield profits, more capital will enter the market. The CSI 300 Index has risen by around 15% for two consecutive years, and equity funds have generally achieved substantial profits, recovering losses from the past few years. Investors' holding experience is rapidly improving. With the lack of alternative investment avenues on one hand, and the equity holding’s wealth effect gaining momentum on the other hand, more capitals are expected to flow into the stock market.
3. Economic Driving Force – Wealth Effect from Stock Market Boosting Consumption and Investments
The biggest drag on the Chinese economy is the wealth shrinkage caused by the decline in real estate prices. A rough estimate suggests that the decline in housing prices over the past few years has led to a nominal wealth loss of over RMB 100 trillion for residents. In spite of significant government investments, high export growth, and respectable GDP figures, the rapid shrinkage of wealth has led to a reluctance and unwillingness to consume.
In April 2025, the Politburo meeting proposed "continuously stabilizing and invigorating the capital market." An article published in the October 2025 issue of the “Study Times” proposed that stabilizing the stock market is a key measure to solidify consumption confidence, enhancing consumer confidence through a three-pronged mechanism of wealth effect, psychological effect, and anticipatory effect.
Facing sluggish consumption and employment pressures, and when traditional methods of increasing investment proven ineffective, the stock market is a good tool. Even it appears that the economic structure is transforming, and new productive forces are emerging, it cannot happen overnight and surely takes time. To boost consumption and stabilize the housing market, the wealth effect of the stock market is viable in a comparative short term. With Chinese stocks market currently undervalued and wealth effects gradually accumulating, a bull market is expected to attract large amounts of investment capital and fostering wealth creation.
4. Corporate Profit Support – Revenue and Profits of Listed Companies Returning to Positive Growth
After nine quarters of declining, the overall profitability of non-financial listed companies returned to positive growth in 2025, with a clearer outlook in 2026. UBS predicts that “the MSCI China Index's profit growth is expected to reach 14% or even higher in 2026, driven primarily by internet platforms, high-end manufacturing, and companies with global expansion capabilities."
After nearly a year of stock market gains, the return to positive growth in revenue and profits of listed companies confirms the pace of economic recovery. This recovery is occurring amidst the collapse of the real estate wealth effect and intense Sino-US competition. This demonstrates the resilience and quality of the Chinese economy, providing fundamental support for a slow but steady bull stock market.
5. Global Landscape – Change in Dynamics of the US-China Competition
From a long-term perspective, this year marks a critical juncture in the prolonged U.S.-China rivalry, with a subtle change in the balance of power. Over the past two decades, China has often been in a reactive position facing the United States. However, starting with U.S. tariff actions in April 2025, China responded assertively, leading to a compromise by the U.S. Similarly, in October, when the U.S. imposed additional port fees on Chinese vessels, China retaliated with rare earth export controls, prompting a swift retreat by the U.S. This indicates a change in the competitive dynamics.
An article from The Economist published in October 2025 arguing that "China is winning the trade war," cited three reasons: first, China has been capable of withstanding U.S. pressure and retaliated effectively; second, China succeeded in establishing new global trade norms while maintaining export growth; and third, the trade war strengthened China’s political cohesion. This demonstrates that western elites are perceiving the changes of U.S.-China competition in term of balance of power.
Global capital is closely monitoring the U.S.-China competition which will influence decision making on investment allocations. Foreign investors have underweighted Chinese markets and withdrawn from Chinese stocks in recent years. As the competitive landscape evolves and becomes clearer, both domestic and foreign investors are likely to increase their long-term allocation to Chinese assets, which can be sustainable in the foreseeable future.
In a strong market, we prioritize growth, technology, and small-cap stocks with higher elasticity. Value stocks can also be considered for stable long-term holding.
Overall, lower interest rates environment, lacking of alternative investment avenue for large amounts of capital, the wealth effect of the stock market, returning to positive growth of the revenue and profits of listed companies and shifting the balance of power in the US-China competition, these five long-term changes have not yet been fully reflected in the stock market, while market valuations are still relatively low. In the coming years, as the stock market gradually reacts to those factors, it will drive the equity market higher, reaching new historical highs and becoming a new arena for wealth creation.