Even as China’s economy suffers, stocks soar. What’s going on?

For Chinese investors, the grass is almost always greener elsewhere. The country’s stockmarket chronically underperforms, meaning that local punters look to bourses in, say, America or Japan, and devise ways of getting cash around China’s capital controls. But this year is different. The Shanghai composite, an index for mainland stocks, hit a ten-year high on August 25th. In dollar terms, it is up by 17% since the start of the year, ahead of both America’s S&P 500 and global indices.

At the same time, China’s economy is suffering from overcapacity, which has induced a widespread race-to-the-bottom mentality. The country’s great commercial and technological achievements, such as its electric-vehicle and solar industries, are among those suffering most from an overabundance of companies competing for the same markets. Even BYD, China’s most successful EV firm, is struggling to pay its suppliers. Losses at many of the country’s biggest solar companies grew in the first six months of the year. Ordinary folk are feeling the pain, too: China’s delivery drivers have been caught in price wars.

The sensational stockmarket performance therefore comes with an uneasy undercurrent. Since the start of the year the Chinese state has sought to buoy sentiment, capitalising on accomplishments such as a breakthrough artificial-intelligence model built by DeepSeek, a startup, and the wild success of “Ne Zha 2”, a locally produced animated film. Another source of positivity has been the state’s crackdown on oversupply, sometimes called the “anti-involution” campaign, which has shown that officials are at least trying to tackle China’s biggest problems.

There are some other reasons for optimism. China’s export-focused manufacturing sector has held up better than expected against President Donald Trump’s trade attacks. On August 25th Shanghai loosened restrictions on home purchases, a move that may boost property prices in the country’s financial hub. Households are beginning to move some of their enormous savings into stocks; companies are purchasing their own shares, having announced 75bn yuan ($10bn) in buybacks in the first half of the year, a modest increase on the second half of the year before; and insurance companies are rushing into the stockmarket, having invested 620bn yuan in the first half of the year, compared with 630bn yuan over the whole of 2024, according to Jefferies, an investment bank.

Yet it can, at times, seem as if the stockmarket is defying gravity. Consider an official data release on August 15th, which showed that consumer spending, industrial production and fixed-asset investment had all slumped by much more than expected. And so stocks plunged? Not exactly. The Shanghai composite rose by 1%.

Firms themselves have struggled—and investors have shrugged. Some 23% of mainland-listed companies that had disclosed their earnings for the first half of the year by August 27th reported losses, the highest share since at least 2016, and up from less than 10% before the covid-19 pandemic. More are due to report in the coming days, but the trend is not an encouraging one.

On top of this, official reforms are not as reassuring as they appear at first glance. Investors hoping for a quick outcome in the state’s fight against involution will be disappointed. China’s industrial policy relies on vast subsidies, which foster intense competition and drive down prices. This is one reason why China’s EVs are so much cheaper than those produced elsewhere. Truly ending involution would mean a wrenching shift away from policies that have been in place for decades, and an acceptance of the higher unemployment that would result as weak manufacturers collapsed. Although this is happening in places, it is unlikely to occur across industries, and on the sort of scale required, when leaders are worried about both joblessness and competing in foreign markets.

All this is jangling nerves among the professionals. A fund manager says stock prices can keep rising so long as liquidity is there, before adding that it looks increasingly shaky. Analysts at HSBC, a bank, recently noted that “the rally feels disconnected from reality.” Even the state may be growing wary. On August 27th a rumour suggested that the securities regulator was trying to reduce use of terms such as “bull market” on social media. Perhaps, then, the rally is about to connect with reality. ■