Why is China cooling the market, for now?

The difficult task of shepherding a "slow bull"

This article is an update to a core idea I laid out last August: China’s capital market had probably entered a quiet bull, supported by five structural tailwinds — but the real challenge was whether that quiet bull could be turned into a generational slow bull, rather than another quick boom-bust cycle.

Looking back today, four of those tailwinds are clearly intact.

Geopolitically, the external pressure has continued to ease materially. Every day, Trump’s antics and the new Monroe Doctrine have even made China a more viable trading partner, and China’s bargaining position has strengthened as its industrial base continues to move up the value chain.

On policy and expectation management, the learning curve is real. Regulators are no longer operating with the blunt, surprise-driven approach that characterized the 2021–2022 period. Policy signals are now layered, iterative, and increasingly conscious of second-order market effects.

On the economic engine, the transition away from real estate is still painful, but it is no longer directionless. High value-added manufacturing, export-oriented Chinese brands, and frontier technologies are now doing the incremental work that property once did.

And most importantly, China’s pivot toward a capital-market-centric development model is no longer theoretical.

In just the past few months, a growing list of strategically important AI-related companies — from chips to large models to hard tech — have either entered the capital market or are lining up to do so. Equity financing is becoming the default channel for frontier industries. Compared with the old land-based and banking-based financing system, the capital market’s role is not only larger — it is structurally indispensable.

The remaining piece, of whether Chinese residents’ excess savings will move into the equities market, however, is far more complex.

Juggling of Objectives

Today, Chinese policymakers are juggling three objectives that are sometimes in tension:

First, they want the stock market to rise. That requires all investors to believe equities are a legitimate long-term asset class.

Second, they are counting on the market to fund strategically critical industries — AI, semiconductors, commercial space — where balance-sheet lending simply does not work.

Third, they do not want a speculative frenzy that ends badly. The explicit preference is a slow bull, not a crazy bull.

But if you want to achieve Objective 2 too dearly, you risk hurting investors’ interests, making you unable to achieve Objective 1. On the other hand, if you want Objective 1 too much, you risk attracting retail money too quickly, thus making Objective 3 of a slow bull elusive.

The difficulty of balancing these three goals became unusually clear over the past two weeks, as we are only fresh into 2026.

How the Frenzy Took Shape

From mid-2025 onward, a sector bull quietly formed in A-share technology stocks, centered on AI infrastructure.

For instance, optical module leaders such as Innolight (300308.SH) and Eoptolink (300502) rose close to tenfold in roughly half a year, reflecting their bottleneck position in AI data centers. Cambricon (688256.SH), one of China’s main challengers to Nvidia, also saw its market capitalization balloon as restrictions on advanced Nvidia chips pushed capital toward domestic alternatives.

Then came commercial space.

A string of supportive policies — most notably the easing of STAR Market IPO rules for space companies (as Amber just documented in our last piece) — coincided with renewed global attention on SpaceX and its potential IPO. Capital rapidly flooded into what began to be labeled the “commercial space sector.”

But in reality, it was barely a sector at all, as most true leaders were still private. And none of the Chinese contenders have achieved the same kind of success that SpaceX has achieved.

Yet, that didn’t stop speculation. Listed companies with only tangential exposure to satellites, launch systems, or aerospace materials were aggressively re-rated. Prices doubled, tripled, and quadrupled within weeks. As investors returned from the New Year holiday, early 2026 saw the frenzy intensify further.

Soon after, the successful listings of LLM companies such as MiniMax and Zhipu AI ignited yet another narrative: “AI applications.”

In a country that has not yet fully cracked advanced GPUs or state-of-the-art foundation models, speculative capital had already leapt ahead to applications. Once again, stocks with only remote relevance were swept up.

This could be the long-awaited moment many had hoped for: retail deposits finally beginning to migrate into the capital market — Except the migration was at the risk of happening too fast.

Last Monday, on Jan 12, total A-share turnover hit 3.6 trillion yuan, an all-time high. I also started hearing tales of massageurs chatting about the opportunity to buy commercial space stocks. An unlicensed influencer reportedly attracted tens of billions of RMB from retail investors into a newly formed fund focused on “AI applications and commercial space” in one live-streaming session.

It was also obvious how this would end if left unchecked. If anything, it would not become a “slow bull”, but would very likely end up in tears again.

The Intervention, Managed Upside, Managed Downside

And soon enough, regulators stepped in.

Several of the most speculative stocks — particularly those with the most extreme short-term gains and thin fundamentals — were ordered to suspend trading pending disclosures. Margin financing rules were tightened. That unlicensed KOL was also reportedly under investigation.

Yet, it was also clear that this is not an all-out campaign against the market. There was no sweeping crackdown, no moralized rhetoric, no attempt to crush sentiment across the board. The actions were selective, technical, and deliberately contained. They were designed to slow momentum, not reverse direction.

Beijing is attempting to short-circuit a feedback loop of leverage, narrative, and retail FOMO that can lead to collapse, while it’s still in its early stages.

This episode also needs to be seen in symmetry.

In mid-December, the market was threatening to break down. At that point, the “national team” (a catch-all phrase for market stabilization mechanism) stepped in with visible buying support, initiating a rare 13-day winning streak — one of the longest in A-share history.

Now, with sentiment tipping toward euphoria, the same apparatus appears to be operating in reverse. Market chatters also suggest that the stabilization fund” may be selling into strength this time around — a rumor that would not be surprising if true.

That is, after all, what a stabilization fund is meant to do: buy when fear dominates, sell when euphoria takes over.

If this interpretation is correct, it suggests that Chinese regulators have become far more sophisticated at managing the market — 操盘 in the literal sense.

And the market is taking cues. Many of the most red-hot speculative stocks in commercial space and so-called “AI applications” have started to tumble, and so far, there is no end in sight for where that slide will land.

For now, this crackdown on over-speculation seems to be working, without hurting the broader sentiment.

The Real Risk

And yet, one concern remains unresolved.