A Day of Miraculous Gains

Today, the Shanghai Composite Index opened higher by 10%, but immediately slid down, ultimately closing up 4.59% at 3,489 points. The total trading volume of the two markets reached a massive 3.45 trillion yuan, setting a new historical high. What is particularly noteworthy is that almost all stocks hit the upper limit at the opening, regardless of whether their performance was good or bad, or whether their P/E ratio was high or low. This market trend can be described as a unique phenomenon unseen in decades.

Questions Behind the Miracle

Behind this phenomenon, we cannot help but ask:

  1. Has the economy truly begun to recover?
  2. Has the business environment improved?
  3. Has investment started to accelerate?
  4. Has consumer intent increased?

Clearly, the answer is no. The market frenzy does not stem from a substantial improvement in economic fundamentals, but rather appears to be the result of human intervention.

Has the Market Reached a Cyclical Peak?

Currently, the market seems to have reached a cyclical peak, but this does not mean the upward trend will immediately end. In fact, the driving force behind this round of market activity is far more than just market sentiment; it is more complex, involving multiple economic and policy factors.

The Fundamental Reason for This Market Rally

Since the economy peaked in 2022, the Chinese economy has gradually entered a deflationary channel. The Purchasing Managers’ Index (PMI) has continuously remained in the contraction zone below 50, total social retail sales growth has stagnated, and the real estate market bubble has begun to burst. Even when some cities lifted purchase restrictions and banks lowered down payments to 15%, real estate prices have still fallen by an average of about 30% over the past two years. Consequently, local governments’ land finance has suffered a severe blow.

Meanwhile, youth unemployment has soared to 18%, and local government debt pressure is increasing. Facing such a severe economic situation, simply relying on the slogan of “praising the economy” is no longer enough to reverse the decline; monetary and fiscal policies must be utilized to alleviate the local financial crisis and the youth unemployment problem.

On September 24th, the central bank implemented interest rate cuts and reserve requirement ratio cuts, providing liquidity support to securities, fund, and insurance companies through a repurchase mechanism. These financial institutions exchanged highly liquid assets such as government bonds and central bank bills for the liquidity required by the market, thereby stabilizing the stock market.

These policy measures directly drove the stock market rally, creating a round of stock market asset bubble. Listed companies thus gained ample capital liquidity, and local governments could alleviate debt pressure by selling shares of state-owned enterprises. Individual investors participated, achieving asset appreciation while simultaneously driving consumption recovery, providing short-term momentum for the economy to escape stagnation.

The Market’s Next Trend

After a week of trading, funds that entered the market early began realizing profits, leading to today’s phenomenon of opening high and falling low. At the same time, the Hong Kong stock market has also started to decline. Does this mean the market euphoria is about to end?

I believe that although the market may experience short-term volatility, the fundamental driving force behind this rally—the support from monetary and fiscal policies—has not yet ended. Therefore, the market’s upward trend may continue. To achieve its economic and policy goals, the government may introduce more easing policies, further increasing support for the market and continuing to drive the stock market higher.

Conclusion

The current market prosperity is exciting on the surface, but in the long run, an over-rise detached from economic fundamentals will ultimately be difficult to sustain.