Content Strategist, Dunham | 2025 ThinkAdvisor Luminaries Award Winner | 2026 Wealthies Finalist, Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
Updated October 25, 2026: China’s CSI 300 entered a bear market on October 22, falling about 20% from its June peak, while outstanding margin-financed positions dropped to levels last seen in late 2025. In February, I warned that a rally supported by liquidity and leverage was vulnerable while the underlying economy remained weak. The reversal brings that risk into focus: borrowed money can amplify a rally—and deepen the selling when confidence fades.
What the February article flagged
What the October update reports
A rally vulnerable to a reversal in confidence
The CSI 300 entered bear-market territory on October 22, about 20% below its June peak, despite state buying
Growing dependence on leveraged stock purchases
Outstanding margin-financed positions declined to levels last seen in late 2025, amplifying market declines.
Weakness in the economy beneath rising share prices, causing false optimism
Weak consumption, profit concerns, and fading stimulus expectations weighed on the subsequent selloff.
Author’s note: This article was originally published on February 20, 2026, under the title “Is China’s Stock Market Rally Forming a Bubble Amid Economic Weakness?” The original analysis follows, with market figures and conditions reflecting that publication date.
Key Takeaways From the Original February Analysis
China’s stock market rally is being driven by liquidity and leverage — not strong economic growth.
Deflation, weak loan demand, and a prolonged property downturn signal continued economic stress.
China’s money supply now exceeds 230% of GDP, highlighting extreme monetary expansion.
Rising margin debt increases the risk of a volatility-driven unwind similar to 2015.
The widening gap between stock prices and economic fundamentals raises questions about sustainability.
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Original Analysis: February 20, 2026
There’s a strange battle unfolding in China right now.
A Bronze Dragon of a stock market versus a Paper Tiger economy.
If you only look at the year-over-year ticker tapes, you’d think China has entered a new Golden Age.
TheCSI 300 Index1 (China’s S&P 500) is up roughly ~20% – hitting it’s highest levels in four years.
TheShanghai Composite Index2 (China’s version of NYSE) is up ~22% - hitting its highest since the great 2015 Chinese stock bubble.
TheSSE STAR Market3 (aka STAR50; their version of the NASDAQ) is up a staggering 40%-plus.
This is what I mean by the Bronze Dragon.
It’s shiny. It’s sturdy. It’s fierce. And it’s fueled by a massive policy pivot toward high-tech "advanced manufacturing” and easy money flooding the system – pushing prices and speculative trading to records.
But markets aren’t the economy.
And that’s where the tension begins.
China’s Real Economy: Deflation, Debt, and a Property Collapse
Underneath the booming market is the real economy (aka Main Street). And it tells a different story.
This is the Paper Tiger.
It looks large. It looks powerful. But it’s actually flimsy and crinkled.
Rampant price wars that have firms - from autos to restaurants - undercutting each other to try and move inventory – even selling below costs to try and gain a sliver of an advantage.
Because of this, the People’s Bank of China (PBOC) slashed interest rates - pushing the 1-Year Loan Prime Rate (LPR) – aka the benchmark for all lending - to a record low of 3.0%.
Figure 1: Bloomberg, Dunham, January 2026
Meanwhile, China’s money supply has absolutely ballooned.
Just look at China’s M2-to-GDP ratio - sitting at a staggering 231%.
M2 is the liquid money supply = cash, deposits, the fuel sloshing around the system.
GDP is the economy = the real output.
That means China’s money supply is 2.3x larger than the entire economy.
For every dollar of economic output, there is more than two dollars of money circulating in the system.
Figure 2: World Bank, Dunham, January 2026
To put this into perspective, the U.S. sits closer to 70%.
Thus, China cut rates and pumped money into the system at an aggressive rate.
And in economic theory - cheaper money should help fund factories, home purchases, and overall demand.
But that hasn’t happened.
All it’s done is cause a liquidity trap - making things worse.
The Balance Sheet Recession Problem
Policy makers in China have learned a harsh lesson – you can’t force a drowning horse to drink water.
It's a rare type of crisis that usually happens when a major asset bubble bursts - especially housing – and households and businesses focus on paying down debt instead of borrowing more (aka deleveraging).
Thus, even if interest rates fall, demand for credit remains weak.
Why? Because, like the horse, you can’t force people to borrow simply because money is cheap.
And this has created a big problem for Beijing.
See, as the PBOC cuts rates to stimulate growth, bank profitability gets squeezed.
Thus, desperate for any type of profit - bank lending is flowing elsewhere. . .
China’s Margin Debt Surge: Is Leverage Driving the Rally?
With limited demand in the real economy, liquidity has instead piled up and started pouring into financial markets.
Meaning – traders were borrowing this cheap money and buying stocks with it.
Just take a look at outstanding margin debt (aka when investors borrow money to buy more stocks). It’s surged 40% since mid-2025, returning to the same volatile levels that preceded the 2015 bubble.
Figure 4: MacroMicro.me, Dunham, 2026
Meanwhile, margintrading volumes recently just hit an all-time high.
This makes sense – because of the margin feedback loop:
The Boom: When credit is cheap, investors borrow to buy. This debt-fueled buying pushes prices higher, which boosts portfolio values. This allows traders to borrow even more. The cycle feeds itself until it’s a self-fulfilling prophecy of dizzying heights.
The Bust: But once the margin is cut off, the loop reverses. Falling prices trigger margin calls. To pay the brokers back, traders are forced to sell. This forced selling pushes prices even lower, triggering more margin calls – and feeding on its collapse.
Beijing wants organic growth – something that will endure and boost the economy.
It doesn’t want hot money-fueled booms that can get rug pulled at any moment (speculative frenzies).
Are Chinese Stocks Disconnecting From Economic Reality?
China’s stock market may continue to climb, even with tighter margins. A rising market clearly benefits Beijing to a degree, as it can lift sentiment and create the perception that momentum has turned.
And liquidity can support markets longer than fundamentals suggest.
But – if in a balance sheet recession – pumping in more liquidity likely won’t fix:
Weak household consumption
Falling property prices
Deflationary pressure
A debt-heavy system
So, the Bronze Dragon may be flying.
But it’s flying with a leverage-fueled jet pack and above fragile ground.
At some point, equity valuations must snap back with earnings, income growth, and real demand.
And if the underlying economy remains weak, the gap between market prices and economic reality may become harder to sustain.
Final Thoughts
Yes. China’s stock rally is impressive. And investors have enjoyed this.
But rallies built on cheap money and margin tend to be fragile.
So, the question isn’t whether liquidity can push markets higher in the short term.
It’s whether the real economy can eventually justify those valuations.
Maybe it will. Maybe it won’t.
As always, this is just food for thought.
Frequently Asked Questions About China’s Stock Market Decline
Why is China’s stock market falling in 2026? China’s stock market is falling as weak consumer spending, pressure on company profits, fading hopes for stimulus, and concerns about AI stock prices weigh on investor confidence. The CSI 300 fell about 20% from its June peak by October 22. A decline in margin-financed positions also points to investors pulling back from borrowed-money bets.
Is China’s stock market in a bear market? The CSI 300 entered a bear market on October 22, 2026, when it closed about 20% below its June high. A bear market commonly means a drop of at least 20% from a recent peak. This label applies to the CSI 300, rather than every stock index in mainland China or Hong Kong.
How does margin debt make China’s stock market selloff worse? Margin debt can deepen a selloff when investors who borrowed to buy stocks must add collateral or sell shares as prices fall. Those sales can put more pressure on prices. By October 2026, China’s margin-financed positions had dropped to levels last seen in late 2025, though that alone doesn’t show how much selling was forced.
Was China’s stock market rally a bubble? China’s rally showed signs of speculation, but the market’s decline alone doesn’t prove it was a bubble. Borrowing and enthusiasm for technology stocks grew even as domestic demand stayed weak. The key question is whether share prices rose beyond what company earnings and economic conditions could support, rather than whether the market crossed the 20% bear-market threshold.
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