China's stock markets are partying like it's 2008, overwhelming systems

• China's stock markets surged this week, marking the best weekly performance since late 2008.

• The rally was driven by Beijing's aggressive stimulus measures to boost the struggling economy.

• The surge overwhelmed trading systems, highlighting the intense investor response to the stimulus.

China's stock markets closed sharply higher Friday, notching their best week in 16 years as investors joined the rally party.

The euphoria was thanks to Beijing's big-bang stimulus announcement on Tuesday, which showed the authorities' urgent and concerted commitment to boosting its ailing economy.

Since Tuesday, Chinese authorities have flooded the market with announcements of interest rate cuts, bank reserve ratio reductions, liquidity injections, and pledges to boost fiscal spending. The stimulus blitz has jolted investors into buying into the previously downtrodden market.

"The ante has been upped on China stimulus. Forget just monetary 'bazooka,' Beijing is mobilizing the fiscal arsenal too," wrote Vishnu Varathan, Mizuho's head of macro research for Asia, excluding Japan, in a Friday note.

He added that this is "as close as Beijing gets to guns blazing." And markets have reacted by swinging from "despondency to delirium."

Mainland China's benchmark CSI 300 index closed 4.5% higher on Friday, its best week since November 2008.

Meanwhile, Hong Kong's Hang Seng Index closed 3.6% higher in its best performance since 2009.

The stock market party overwhelmed tech systems

The stock market party got too hot to handle.

"Due to surging trading volume, the Shanghai exchange and brokers report some trades have been delayed," Hao Hong, chief economist at Grow Investment Group, posted on X.

"The trading system is simply overwhelmed. There is a huge stampede of stock bulls," added Hong.

The Shanghai Stock Exchange said in an announcement that it was investigating the delays.

The market euphoria — now into its fourth day — came despite reservations about China's aggressive stimulus that it rolled out on Tuesday — which some analysts suggested panic in Beijing over the state of the world's second-largest economy.

China's economy has struggled to sustain its growth momentum since the pandemic ended. It is battling multiple challenges, including an epic property crisis, high youth unemployment, and deflation.

While Chinese authorities have introduced support measures earlier, its stock markets couldn't sustain gains convincingly following a massive meltdown at the beginning of the year — a stark contrast to the hot money flowing elsewhere like the US, Japan, and India.

"Investors we spoke to generally have low conviction in the sustainability of the rally," acknowledged Bank of America analysts in a Friday note. However, the bank is more optimistic.

"Chinese financial regulators rarely encourage banks/financial institutions to increase leverage for the stock market but are doing so this time," the Bank of America analysts wrote, referring to Beijing's announcements of swap and re-lending facilities for stock buybacks.

Furthermore, the US Federal Reserve has started cutting interest rates, which has historically benefited Chinese markets, they added.

So even if Beijing's stimulus isn't enough for China's economy, a liquidity or leverage-driven market rally could still be "very powerful," they wrote.

There's historical precedence, the Bank of America analysts added.

The CSI 300 index more than doubled from the fourth quarter of 2014 to the first half of 2015 after Beijing used government stimulus to arrest a slowdown. This preceded economic recovery that did not happen until the second half of 2016.

Top-down direction matters a lot in China

Despite reservations about whether China's stimulus is enough — and if the current market rally is sustainable — it does look like Beijing is ready to do whatever it takes to revive its economy and markets.

On Tuesday, People's Bank of China governor Pan Gongsheng said at his stimulus announcement that authorities stand ready to inject more liquidity into the system if the support measures for swap and re-lending for share buybacks — collectively at $800 billion yuan, or $114 billion, prove successful.

"Indeed, while this isn't QE, moral suasion in China has somewhat more force than elsewhere. " wrote Global Data.TS Lombard economists Freya Beamish and Rory Green in a note on Thursday, referring to quantitative easing.

After all, "Chinese companies live and die based on whether they are singled out as policy favorites, CEOs sometimes literally," they added.

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