The real force powering China's market rally isn't mom-and-pop investors this time, says Goldman Sachs

Core Viewpoint - China's stock markets are experiencing a significant rally, primarily driven by institutional investors rather than retail investors, with Goldman Sachs suggesting that the bull run may continue further [1][2]. Group 1: Market Performance - Chinese equities have gained approximately $3 trillion in market value this year across Hong Kong and mainland markets [2]. - The CSI 300 index has increased by 26% since April, while the MSCI China index has risen over 35% year-to-date [2]. - Domestic insurers have raised their equity holdings by 26%, and domestic hedge funds have increased assets under management from 5 trillion yuan to 5.9 trillion yuan (approximately $830 billion) [3]. Group 2: Investor Behavior - Institutional investors, including onshore mutual funds, have significantly reduced cash ratios to five-year lows as they invest heavily in stocks [2]. - Chinese households hold about $5 trillion in equities, representing roughly one-third of the total Chinese equities market, with most of the remainder held by global and domestic institutional investors [4]. - Only 11% of Chinese household financial assets are allocated to equities or mutual funds, compared to about 32% in the US, indicating potential for increased investment in stocks as property prices decline and bank deposit yields remain low [5]. Group 3: Market Sentiment and Valuation - Retail sentiment is not at euphoric levels seen in previous market peaks, suggesting room for growth; if enthusiasm returns to those highs, the CSI 300 could gain an additional 18% to 27% [6]. - Current valuations of Chinese shares do not appear stretched, and they trade at a discount compared to developed-market equities [7]. - Despite the stock market's outperformance relative to the slowing economy, this disconnect is noted as a global phenomenon [7]. Group 4: Policy Risks and Outlook - The primary risk to the market is policy-related, as previous rallies have ended due to regulatory tightening; however, the stock market's importance to Beijing suggests a low likelihood of deliberate downturns [8][9]. - Goldman Sachs maintains an overweight call on China's mainland-listed A shares and Hong Kong-listed H shares, forecasting 8% and 3% upside over the next 12 months, respectively [9].