China’s stock market has been on a roll — is it a boom or a bubble?

China’s stock market has seen a sharp rally this year as progress on artificial-intelligence, steps aimed at gaining chip self-sufficiency and Beijing’s campaign to rein in price wars fuel investor optimism.

But as retail investors push the market higher, and bulls cheer liquidity support and policy tailwinds, some experts are raising questions if the market is entering bubble territory.

The mainland CSI 300 index has climbed about 16% since the start of the year and is hovering close to more than three-year highs. The CSI 300 Information Technology Index, which measures the performance of tech companies within the CSI 300, last week hit its highest level since 2015.

“China’s ongoing equity rally appears disconnected with the economic fundamentals,” said Raymond Cheng, regional CIO for North Asia at Standard Chartered, adding that “retail investors have played a key role as they have been shifting some of their bank deposits into equity markets.”

Retail investors dominate China’s onshore stock markets, accounting for around 90% of daily trading, according to HSBC data. That’s a sharp contrast with major global exchanges, where institutions lead activity — on the New York Stock Exchange, for example, individual investors make up only 20%–25% of trading volume.

Total Chinese household savings currently stand at more than 160 trillion yuan ($22 trillion), a record high, according to HSBC. However, only 5% is allocated to equities, which means there is room for retail participation to deepen, especially as deposit rates fall and property remains out of favor, analysts told CNBC.

“Fundamentals do not well support the momentum, but markets always lead fundamentals,” said Hao Hong, managing partner and CIO at Lotus Asset Management. “There are few signs of overheating in the overall market, but pockets of the market are a little too hot.”

“This is not yet a bubble, but it is going that way,” said Hong. He pointed to contract research organizations — firms providing research and development services to pharma, biotech, medical device companies — and technology names as the riskiest segments, but stopped short of labeling them as bubbles.

More than $3 trillion in market capitalization has been added across Chinese and Hong Kong equities this year, according to Goldman Sachs. But China’s economic data offers little confirmation that a genuine and sustainable rebound is underway, market watchers said.

Japanese financial holdings company Nomura last month warned of excessive leverage and potential “bubbles” as the stock market continues to surge even as China’s economy shows signs of sputtering in the second half of the year. 

China’s economic slowdown worsened in August as a series of key indicators fell short of expectations. Persistent weak domestic demand and Beijing’s efforts to reduce industrial overcapacity weighed on production.

Industrial output rose 5.2% last month, easing from July’s 5.7% growth and marking its weakest pace since August 2024. Retail sales grew 3.4% year on year, below analysts’ forecast of 3.9% in a Reuters survey and slower than July’s 3.7% growth.

“So far, we have not seen signs of a turnaround in macro fundamentals, although the current momentum might be supported by expectations for structural improvements in the economy,” said Chaoping Zhu, global market strategist at J.P. Morgan Asset Management.

Semi-annual reports suggest some stabilization in sectors such as AI, semiconductors and renewables, and Beijing’s “anti-involution” push — aimed at reining in price wars — could improve corporate earnings capacity, Zhu said.

For example, Chinese chipmaker Cambricon reported record profits in the first half of the year, jumping more than 4,000% year on year to 2.88 billion yuan ($402.7 million) in the first six months, highlighting the growing momentum of domestic chip companies as Beijing pushes to strengthen its homegrown semiconductor sector.

Still, Zhu cautions that technology valuations may have “priced in very optimistic expectations,” leaving the market vulnerable to pulling back before earnings catch up.