Eliza Wong
Executive Summary
Goldman Sachs’ latest analysis reveals critical insights about China’s ongoing equity market surge:
– Institutional investors, not retail traders, are driving the liquidity-driven bull market with foreign hedge funds recording record A-share inflows
– The rally combines reflation expectations and AI autonomy themes, with CSI 300 gaining 26% from April lows
– Valuation expansion remains primary return driver (80% historically) with current multiples below historical牛市 (bull market) peaks
– $14-30 trillion potential institutional inflows possible if China reaches emerging/developed market ownership levels
– Policy indicators suggest limited near-term tightening risk despite recent gains
China’s Equity Surge Defies Conventional Narrative
Global investors are closely watching what Goldman Sachs analysts Kinger Lau (刘劲津) and Si Fu (符思) describe as a genuine liquidity-driven bull market unfolding across Chinese equities. Contrary to popular belief that retail speculation fuels the rally, data reveals sophisticated institutions—both domestic and foreign—are providing the crucial capital infusion. This liquidity-driven bull market represents a significant shift in market structure that international investors must understand to capitalize on opportunities.
The current liquidity-driven bull market began with what analysts term the ‘DeepSeek moment’ in late January, gaining momentum through February’s private enterprise symposium and April’s U.S.-China trade tensions easing. The CSI 300 has surged 26% from April lows and 15% year-to-date, outperforming many global benchmarks. This liquidity-driven bull market demonstrates particular strength in technology and AI-related sectors where China’s autonomous development initiatives are bearing fruit.
Reflation Trade Gains Momentum
From a macro perspective, expectations of policy-driven supply-side rationalization and improved pricing environments for goods and services have triggered financial market reflation trading. Since July 1, 10-year government bond yields have increased 16 basis points, demonstrating clear rotation from fixed income to equities. This asset shift underscores the liquidity-driven nature of the current market phase as investors chase higher returns in risk assets.
Dual Catalysts: Reflation and AI Autonomy
Goldman identifies two powerful themes driving this liquidity-driven bull market: renewed inflation expectations and accelerated technological self-sufficiency. The August release of DeepSeek’s V3.1 version injected fresh momentum into upstream AI design and semiconductor manufacturing sectors, creating a differentiated competitive advantage compared to overseas markets dominated by hyperscale computing and cloud operators.
This liquidity-driven bull market benefits from both cyclical and structural tailwinds. The reflation trade reflects expectations of improved pricing power across Chinese industries, while AI autonomy represents a strategic national priority with substantial government support. Together, these themes create a powerful narrative attracting both domestic and international capital.
Global Liquidity Phenomenon
Goldman emphasizes that liquidity-driven, valuation-expanding equity rallies aren’t unique to China but represent a global phenomenon. In the post-pandemic era, liquidity rather than cyclical macro fundamentals or realized earnings has become the primary engine for global equity appreciation. Among the world’s ten largest equity markets, eight trade at or near historical highs with valuations approaching the upper end of their historical ranges.
The MSCI All Country Index shows approximately 70% of gains derived from price-to-earnings multiple expansion rather than earnings growth. In this context, China represents a ‘latecomer’ to the global ‘liquidity feast,’ suggesting further room for valuation catch-up. This global context helps explain why the current liquidity-driven bull market has further room to run despite already impressive gains.
Institutional Investors: The Real Market Movers
Counter to mainstream narrative, Goldman’s data reveals institutions rather than retail investors drive this liquidity-driven bull market. Domestic mutual funds rapidly increased equity exposure in recent months, with cash ratios in investment portfolios dropping to five-year lows. Meanwhile, domestic insurance companies have raised stock allocations by 26% year-to-date, while private equity funds grew from 5.0 trillion yuan in September 2024 to 5.9 trillion yuan currently.
Foreign participation reached cyclical highs, particularly in A-shares. Goldman’s prime brokerage data shows global hedge funds recorded their highest monthly A-share inflow in years during August. Northbound trading activity, representing foreign investment through stock connect programs, also surged to record levels, confirming sophisticated money leads this liquidity-driven bull market.
Fundamental Support Exists
While liquidity drives short-term moves, Goldman notes underlying fundamental support exists. Normalized corporate profits are projected to achieve mid-to-high single-digit growth between 2025-2027. First-half 2024 profits grew 3% for onshore and 6% for offshore listed companies. Specific sectors like technology/AI show improving earnings revisions, while corporate cash returns reached record highs, providing fundamental justification for this liquidity-driven bull market.
Sustainability: Earnings Helpful But Not Essential
Goldman’s analysis of 47 bull markets in A-shares and H-shares over the past two decades reveals that P/E multiple expansion consistently drives approximately 80% of returns during bull phases. Even in rallies exceeding 50% gains, earnings upgrades served as secondary rather than primary drivers. This historical precedent suggests the current liquidity-driven bull market can continue without immediate earnings acceleration.
Current valuations remain reasonable relative to history. MSCI China and CSI 300 trade at 13.5x and 14.7x 12-month forward P/E respectively, below the 15-20x historical valuation ceilings observed during previous bull markets. This valuation cushion provides room for further multiple expansion in this liquidity-driven bull market before reaching concerning levels.
Stronger Foundation for Sustained Growth
The foundation for a ‘slow bull’ market appears stronger than ever. Market-oriented reforms like the ‘New National Nine Articles’ improve shareholder returns, while ‘patient capital’ from long-term investors reduces volatility. Stricter leverage regulations and more experienced regulatory management of market cycles create conditions for more sustainable growth in this liquidity-driven bull market compared to previous episodes.
Overheating Risks Remain Contained
As prices surge, investors naturally question overheating risks. Goldman developed an ‘A-share retail sentiment proxy indicator’ currently reading 1.3, suggesting short-term consolidation risk rather than impending trend reversal. Market sentiment remains far from the euphoric levels seen in 2015 or late 2020, indicating this liquidity-driven bull market maintains healthy skepticism.
Historically, policy shocks rather than valuation excesses typically reverse bull trends. To monitor this risk, Goldman created a new ‘equity policy barometer’ tracking keywords across 50,000 government websites and policy statements. Current readings suggest low policy tightening intensity and risk, supporting continuation of this liquidity-driven bull market.
Massive Incremental Capital Potential
China’s equity market possesses enormous untapped capital potential. Household asset allocation remains heavily skewed toward real estate (55%) and cash deposits (27%), with stocks (including mutual funds) representing just 11%—far below global peers. As property markets adjust, trillions of yuan could gradually shift from deposits and real estate to equities over the long term.
Specifically, households accumulated 80 trillion yuan in new deposits since 2020, with 55 trillion considered excess savings. Wealth management products (31 trillion yuan) and money market funds (15 trillion yuan) provide additional potential equity sources. Annual property market outflows exceed 14 trillion yuan seeking new investment homes, creating sustained tailwinds for this liquidity-driven bull market.
Institutional Ownership Gap Presents Opportunity
Institutional investors hold merely 14% of A-shares, dramatically below emerging market (50%) and developed market (59%) averages. If institutional ownership reached emerging or developed market levels, potential inflows could reach 14 trillion or 30 trillion yuan respectively. This massive institutional ownership gap suggests the current liquidity-driven bull market represents just the beginning of a longer-term repricing story.
Strategic Positioning for Continued Gains
Goldman maintains its overweight stance on Chinese equities, recommending buying on dips given the liquidity-driven bull market’s ongoing momentum. The firm favors structural themes including AI, anti-involution (premiumization), and shareholder return improvement. Sector preferences include communications, media & technology (TMT)/internet, consumer services, insurance, and materials—all positioned to benefit from this liquidity-driven bull market’s continuation.
International investors should focus on companies with strong governance, cash return policies, and exposure to national strategic priorities like technological autonomy. The liquidity-driven bull market creates opportunities particularly in previously undervalued segments now attracting institutional attention. As always, policy monitoring remains crucial given historical sensitivity to regulatory changes.
Navigating China’s Evolving Market Landscape
Goldman’s comprehensive analysis suggests China’s equity market transformation reflects deeper structural changes beyond short-term momentum. The liquidity-driven bull market represents a maturation of China’s financial markets as institutional participation increases and regulatory frameworks evolve. With reasonable valuations, massive reallocation potential, and improving fundamentals, Chinese equities offer compelling opportunities for global investors willing to understand these nuances.
Monitor key indicators including the PBOC’s liquidity operations, institutional flow data, and policy sentiment indicators to navigate this environment successfully. The liquidity-driven bull market likely continues though possibly with increased volatility as markets digest gains. For sophisticated investors, China represents one of the most interesting allocation opportunities in global markets today.
