Bubble risks grow for bull run in China

Investor red flags are starting to multiply

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China's economy is being strained by US tariffs and a deep-rooted property crisis, yet stocks are extending their bull run — a disconnect that's stirring doubts on the rally’s staying power.

In just the past month, onshore stocks have added almost a trillion dollars to their market value, the Shanghai Composite Index has hit a decade-high and the CSI 300 Index has taken its advance from this year’s low to more than 20%. That's when nearly every recent economic indicator — from consumption trends, home prices to inflation — has brought red flags for investors.

The rally has been driven by cash-rich investors shifting into stocks amid a lack of alternatives. While the market's steady advance may suggest less risk of a sudden correction, some analysts are warning that a bubble is in the making. Nomura Holdings Inc is cautioning against “irrational exuberance,’ while TS Lombard is calling the mismatch a standoff between “market bulls and macro bears.”

“Markets might be expecting, either correctly or incorrectly, that macroeconomic fundamentals will improve,” said Homin Lee, senior macro strategist at Lombard Odier Ltd in Singapore. “But a bull market will not be sustainable if inflation remains close to 0% and corporate pricing power faces severe headwinds from weak domestic demand.”