China's stock market won't keep beating the entire world

Good morning investors! One question my friends keep asking me: Will the Chinese stock market rally keep going?

Today’s edition’s should give you the context to answer it for yourself.

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Bulls could soon leave the China shop

China emerges from its week-long market closure with the best-performing stock market in the world year-to-date.?

That statement only became true nine trading days ago.??

As of Monday, the iShares MSCI China ETF has returned about 43.5% year-to-date, handily outpacing S&P 500’s 20% gain.?

Before September 23, the US benchmark had more than doubled the returns of its Chinese counterpart.

One day later, China introduced a wide-ranging stimulus package — which included $113 billion in liquidity for its equity markets — and it was off to the races.?

If you isolate the performance to just the third quarter, the results are equally as startling.

Here’s how China's benchmark stock index performed in the three months to September 30 against those of the US, Japan, and Europe.?

In the last week of September, Chinese stocks added almost $2 trillion of market value, according to Bank of America data.

Meanwhile, China’s weighting in the MSCI Emerging Market Index jumped from 24% in August to 30% now.?

For context, this is the fourth policy-fueled rally Chinese stocks have enjoyed in the last four years. Each of the last three fizzled not long after they started — including the one earlier this year in May, according to data from Charles Schwab .?

Investors like to pile in to capitalize on any juice from Beijing, but enthusiasm in markets hasn’t been able to shake broader pessimism on China’s economy.?

“With valuation largely normalized, the easy money has been made,” said Bank of America analyst Willie Chan. “We suspect the ‘buy everything in China’ stage will be over soon.”

To Chan’s point:

• Deflation is still an issue in China
• The real estate outlook remains bleak
• Consumer confidence continues to deteriorate
• Local government debt is in bad shape

No wonder JPMorgan, HSBC, Invesco, and other Wall Street firms remain skeptical about the latest stock surge.?

Strategists at 高盛 , however, still see upside ahead for Chinese stocks.

Beijing, the bank argues, could still unleash more stimulus measures.?

As things stand, according to Goldman, the government has already implemented “a more substantial policy stimulus that contrasts with the sporadic and modest easing measures over the past few years.”

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