China’s stock market surge slows down as indications of overheating emerge

China’s Stock Market Surge Shows Signs of Cooling

After a period of rapid gains, Chinese equities lost some momentum on Tuesday. The recent surge in trading activity and a spike in margin lending have raised concerns that the market may be overheating.

The CSI 300 Index ended the day 0.6% lower, while Hong Kong’s main indices also trimmed earlier advances. Trading volume on the Shanghai and Shenzhen exchanges soared to a new high of 3.65 trillion yuan ($523 billion), surpassing the previous day’s record. Margin trading value jumped 1.8% to 2.65 trillion yuan, marking the largest increase in three months.

Tech Stocks Drive Early-Year Rally

Chinese stocks kicked off the year with strong gains, fueled by renewed enthusiasm for technology companies. Advances in artificial intelligence and government support for the sector have propelled chipmakers and hardware producers, with the Star 50 Index—focused on technology—rising over 9% in January. A series of IPOs from domestic semiconductor and AI firms has further boosted investor optimism.

Warning Signs Emerge

However, some cautionary signals are appearing. The 14-day relative strength index for the Shanghai Composite reached 81 on Monday, its highest level since August, indicating the market may be overbought. Additionally, warnings about speculative trading in so-called “rocket stocks” that have seen sharp price increases have started to weigh on investor sentiment.

Market Cooling Measures Take Hold

According to Fu Zhifeng, Chief Investment Officer at Shanghai Chengzhou Investment Management Co., “A range of actions to temper the market are starting to show results,” including risk alerts issued by listed companies.

Exchange-traded funds tracking the CSI A500 Index—which includes some of China’s largest and most actively traded firms—are now experiencing outflows after a period of record inflows.

Outlook Remains Positive

Despite the recent pullback, authorities and state media have not issued direct warnings about excessive speculation. Stronger economic fundamentals could help sustain the rally. Analysts predict that companies in the MSCI China Index will see earnings grow by 14% this year, outpacing similar indices in India and Japan.

Even after Tuesday’s decline, the CSI 300 has risen 2.8% since the start of the year, outperforming global markets. The Hang Seng Tech Index has climbed more than 6%.

“Current fundamentals, market sentiment, breadth, and seasonal trends all suggest that downside risk is limited while there is still room for further gains,” said Zhang Qiyao, an analyst at Industrial Securities. “February often brings strong returns, and any short-term dips could offer attractive buying opportunities.”

Reporting assistance by Lin Zhu.

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