Five structural forces that could extend China's "Quiet Bull" into a generational shift
The triple storm in 2022 has turned into 3 triple tailwinds
China’s capital market is entering a bull market, but not many people are talking about it. In the offshore market in Hong Kong, the Hang Seng Index has already returned close to 30% for the year, ranking among the best-performing markets this year. The onshore A share market has been muted for a while, but the Shanghai Composite Stock Index has recently broken out to reach the highest level in 10 years, and we are only ~30% away from the highest point in 18 years.
In our Discord community, members have been discussing how this “bull” must have been the quietest bull in our memory. Indeed, as
just observed in our latest article, the retail sentiment this time seems to be remarkably subdued.[Baiguan’s Discord community is accessible for our hundreds of paying subscribers only. After you subscribe, you will receive an email with the invitation link.]
So how do we understand this “Quiet Bull”? Amber’s article did a great job at explaining the liquidity and sentiment drivers behind it, but how do we assess the magnitude of its momentum and the length of its runway?
I believe this bull market has at least five strong long-term tailwinds supporting it. Among them, three are switched from what used to be a triple-storm that brought the market to its bottom in the first place, and two are new forces that have only recently begun to take shape.
Let’s talk about them one by one.
The triple storm of 2022
Dialing back to 2022, China’s capital market entered into not just one storm, but a perfect storm of three.
First, 2022 marked the year when geopolitical tensions for China dramatically deepened. As the Ukraine War broke out, a sudden knee-jerk reaction regarding the Taiwan Strait kicked in. As Nancy Pelosi visited Taiwan, the brewing tension between China and the US suddenly turned ideological, and the risks for foreign investors suddenly became binary.
Second, a series of policy decisions wrecked investor confidence. The most prominent example was the “double-reduction” crackdown on the after-school tutoring sector that wiped out tens of billions of value in one stroke. The zero-COVID policy and Shanghai lockdown were also extremely controversial, and despite my empathy for the policy rationale, the end result was far from happy.
Finally, a special policy decision was the self-detonation of China’s real estate sector. It started with the “three red lines“ announced in late 2020, whose real effect was only felt in the later years. Although I believe this policy is correct in the long term, and I applaud leadership’s courage to take it on, there is no denying that shutting down a core economic engine, while other storms were also blowing, made the situation much worse.
This triple storm took China’s market, both offshore and onshore, racing to the bottom. In March 2022, JP Morgan’s analysts screamed: China is uninvestable! And the label stuck for at least 3 years, destroying confidence and sending the market to one new low after another.
However, fast forward to today, all of the triple storms have turned into tailwinds.
Tailwind 1: Geopolitical tension is dramatically easing for China
2025 is supposed to be a big geopolitical year of struggle for China. As Trump re-entered the White House and launched Trade War 2.0, China was bracing for impact.
It turns out, China has played this game masterfully by responding with strong and speedy tit-for-tats and by putting to good use strategic leverage like rare earth metals. It appears that Trump has simply given up on squeezing China, but shifting attention to weaker targets like India, while the tariffs on China have been paused again and again. Even export controls are loosening.
The whole episode has shown one thing: no longer is China a junior party that could be squeezed at will, but a true counterparty on an equal footing.
Three more developments are further loosening the geopolitical pressure.
First, technological advancements in China, as represented by the “DeepSeek Moment” and rumors around China’s latest advancements in advanced chipmaking, show that the moment for China to break the remaining strongholds of so-called “stranglehold technologies” may come much sooner than previously believed. It appears that a key strategic leverage that the US holds over China will crumble soon, if not already.
Second, following the Alaska summit between Trump and Putin and the subsequent “schoolmaster session” in the White House with European leaders, it appears that a final settlement for the Ukraine War is nearing, thereby alleviating China of the geopolitical pressure that has been mounting since the war's outbreak.
Even the situation in Taiwan turns out to be much more accommodating than feared, and it’s not just because Trump seems to fall out with Taiwan. The total fiasco of the pro-independence DPP’s recall vote gambit (an event that has been severely under-reported by the Western media despite its significance), together with the surprising popularity of a pro-China influencer, shows to a surprised world a real, non-zero chance of a peaceful and negotiated reunification. At the very least, many basic assumptions about Taiwan are being reset because of these new developments.
Tailwind 2: Policy-making and expectation management are improving
A major scar for investors is the string of policy missteps in 2021 and 2022. To be fair, many of the policies, including “double-reduction”, were well-intentioned. The problems were with the implementation and communication. Most of the failures can be attributed to a lack of expectation management skills in dealing with the capital market.
But Chinese authorities are learning fast. In the aftermath of the double-reduction fiasco, Chinese regulators began to talk about how to avoid “the fallacy of composition”. For the first time ever, in late 2023, the Politburo started to talk about “expectation management”. In the article China's learning curve for expectation management, written last year, I pointed out that the Chinese authorities were relatively inexperienced with dealing with the capital market, but they were going through a steep learning curve.
A classic example was the mini-fiasco over the draft online video game regulation in late 2023 which wiped out billions of value from Tencent and NetEase, meticulously analyzed here. I correctly projected at the time that the relevant draft would be taken down very soon. In fact, it took authorities only a few days to backtrack, and very soon even the official in charge of this was reportedly sacked as well.
This learning curve means that when it comes to consequences for the capital market, the Chinese regulators will be more conscious than they were 4 years ago, creating a more accomodating environment for investors.
What’s also helpful is that the Chinese government has continued to issue pro-opening-up and pro-reform policies, hitting all the right notes. This ranged from unprecedented unilateral visa-free programs, which made citizens from over 70 countries able to visit China without a visa, to the reiteration of protection for private business owners.
Will they keep improving? I will discuss about in more detail in Tailwind 4 of this essay.
Tailwind 3: The new economic engine is emerging
A major blow to confidence in recent years has been the faltering real estate market, and there has been no clear sign that this market has recovered yet, putting a lot of pressure on macroeconomics.
However, it is possible that the main economic engine for China is quietly being switched. In the first installment of our collaborative column with Horizon Insights (弘则研究), Mr. Ma Dongfan, founder of Horizon Insights, opined that traditional macro-economic indicators such as Total Social Financing and real estate sales were no longer enough to assess the economic health of China.
Mr. Ma went on to point out that:
China’s new economic engine is no longer real estate, nor low-end contract exports—but rather the international expansion of Chinese brands.
We agree. In our discussion about the May consumption data, we also observed that corporate profits were clearly improving because of the rise of Chinese brands:
Beyond these active efforts to protect business margins, we also start to witness the emergence of many “premium” businesses with strong profit margins. The rise of POP Mart and Laopu Gold, two companies we at Baiguan have written multiple times about (most recently here and here), are two strong cases in point.
Concurrent with the “premiumization” of businesses is the string of unprecedented anti-involution policies across all major sectors, ranging from solar to steel, from EV to food delivery.
Closely tied to the crackdown on “involution” is the new policy pivot towards boosting consumption. Last December, we observed that China is finally getting serious about boosting consumption. Afterwards, the government has gradually rolled out a number of consumption-boosting policies, including the child-birth subsidies, something that has never happened before.
Thus, the new economic engine that’s taking shape in place of real estate is mainly made of two parts: 1) the emergence of high-value-add industries, from electric vehicles to IP products, with improving profit margins, and 2) growing domestic demand untethered to real estate.
As of now, this engine has not fully arrived yet, but the trend seems irresistible.
Tailwind 4: a policy pivot towards the capital market
Real estate is not just a big industry, but the cornerstone of China’s financial system. With this engine stalling, the financial system got stalled as well.
Property should never be simply understood as a piece of land or some space for people to live or work. Property is a key financial instrument. Indeed, it has been the most important financial instrument in China for many decades.
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Therefore, what China loses with an imploding property market is not just a major limb of our GDP, but a whole system of arteries and veins that pump vital energy to every cell of the economic system.
To replace this old property-based financial system, China can only now turn to the capital market to power future development. The capital market thus became not just a choice, but a necessity for the China.
This is the fundamental reason behind the growing sophistication of expectation management as described in Tailwind 2, and also why the Chinese government's attitude towards the capital market has shifted remarkably in the last few years.
We are among the very first voices to remind you of the significance of government mandate to require state-owned enterprises to incorporate investor-friendly metrics into KPI measurement, effectively grading socialist managers on (at least partially) how well their capitalist shareholders are treated, paving the way for re-evaluation of many state-owned enterprise stocks.
We started to hear unprecedented investor-friendly words to place investor interests over issuer/corporate interests, such as “Only when investors are well protected, will there be a solid foundation for a prosperous market”, “Build an investor-centric capital market建设以投资者为本的资本市场”.
Local governments openly talked about “market capitalization management”, an euphemism for various measures to boost stock prices, for local listed companies.
Also notable was Wu Qing’s appointment as head of CSRC in 2024, who became the first-ever securities regulator to actually have a securities background, rather than a banking background like all of his predecessors. Mr. Wu can be seen as the personified symbol of the ground shift from banking to the capital market. Immediately after Wu Qing took office, CSRC issued massive fines for securities fraud and market manipulation right on the eve of the Chinese New Year (government employees worked overtime again). Making big monetary penalties, a practice long used by the US SEC, has only recently taken off in China.
Perhaps I am too young, but I have never seen the Chinese government, both central and local, pay so much attention to developing a strong capital market as it does now.
Tailwind 5 (yet to be fleshed out): Where will household excess savings go?
However, government support alone is not enough to dictate stock price to rise. Nor is the fact that all the triple storms of 2022 have switched direction enough to usher in a bull market. These are all necessary but not sufficient conditions.
To really initiate a bull, new money has to come in. The natural question to ask is, where does the money come from?
In fact, China does not have a lack of money. The problem is the opposite: after several years of weak sentiment and Covid-induced impact, Chinese households are being extremely cautious and have been hoarding cash deposit savings at record level, which in turn lower deposit returns on savings and adding to further deflationary pressure.
Goldman Sachs estimates that there is currently 55 trillion RMB of “excess deposits” in Chinese housholds compared with pre-Covid trends.
All of these excess deposits are potential source of funding to fuel the bull, and I believe eventually they will come into the market. My main reasoning is that, for the first time in history, investing in stocks (not speculation) can actually offer viable alternatives to either cash deposits, whose returns are close to zero, or buying property, which is still testing the price bottom. Because the valuation has been so low, stocks of some of China’s largest and most stable companies now offer much higher return even just through dividends. For instance, China Mobile’s A share currently has a dividend yield of ~4%, (it used to be as high as 7% back in 2024), several times higher than 1-year deposit rate of less than 1%. Indeed, Chinese investors are taking note of this gaping differential, and bidding up the high-dividend sector long before the current bull market took shape yet.
Despite this line reasoning, most of these “excess deposits” are still sitting on the sidelines and are still quite suspicious of the stock market, making this bull so “quiet”.
They deserve to be suspicious. Too many false hopes, like the ephemeral mini-rally last September, have left enough scars on Chinese retail investors’ sentiment. It will take a lot of convincing for them to really consider entering the market again.
On the other hand, I believe it is a great thing take it slowly. The worst thing to happen now is to have a “crazy bull” again, only for it to crash soon, wiping out wealth and adding further pains to households, repeating past cycles.
Can we break free from the “short bull, long bear” cycles?
Will we repeat past cycles, or is it beginning of something new?
All of the tailwinds that I discuss above are long-term in nature. Regardless of how the current cycle plays out, I believe these tailwinds will remain in place for years, even decades. So it is not impossible that, just like the housing reform in 1999 initiated more than 2 decades of property market boom, we may be at the doorstep of a new era when the capital market takes the center stage.
But is a multi-decade “slow bull” really realizable? It’s the most ideal scenario, but I won’t believe it will come so easily. A key feature of China’s market has been short, eruptive bulls, only to be followed by long, painful bears. In Chinese, it’s called “牛短熊长 short bull, long bear”. As the fundamental retail-driven investor base has not changed, this feature will not disappear instantly.
Like all big things in China, changes do not come in a day, but through “waves” - one iteration after another, until one day when we look back, we realize the time has changed, yet it’s never easy to pinpoint exactly when.
While the boom and bust cycles will continue, it’s very likely that we are going through a new round of “iterations” that will be markedly different from previous cycles. Again, it’s important to note that we now have a government that’s getting more sophisticated with dealing with the capital market each day. One key example is that back in April, Chinese central bankers have confirmed a “quasi-market stabilization fund” is effectively in place, which functions as buyer of last resort and has been purchasing shares when the market sentiment was extremely low. It’s important to note that it’s called “market stabilization fund”, not a “share-pumping fund” for a reason. The implication is that, if this current bull swerves into something crazy, now the “National Team” also has enough chips to cool down the market and avoid extreme market movements.
If they can play it right this time, they have a chance at shepherding the Quiet Bull into a multi-decade Slow Bull.
