China's stimulus rally has already sent stocks up 25%. And there could be more to come

China stocks will keep rising after markets in the mainland reopen following the Golden Week break, analysts predicted.

Beijing's announcements of economic support last week have fueled China's CSI 300 blue-chip index to rally over 25% in a nine-day winning streak. On Monday, it popped over 8% to its best day in 16 years and the Shanghai Composite Index surged 8.06%, before the markets closed for a week-long holiday.

Then, Hong Kong stocks dropped on Thursday, ending a 6-day winning streak and sparking fears that China's stimulus rally could have started to fizzle out.

Shanghai Composite Index

Now, one question on investors' minds is how long will the rally last?

In China, it could continue for an extended period after the mainland markets come back online next Tuesday, said Eugene Hsiao, head of China equity strategy at Macquarie Capital, who viewed the decline in Hong Kong on Thursday as "short-term profit taking given the sharp rise" a day prior.

Beijing's recent stimulus blitz coupled with higher participation from retail investors will likely fuel a longer rally, he said.

The rally could even continue through the end of the year, said Shehzad Qazi, chief operating officer at China Beige Book International.

But it faces the risk of "an ugly reversal in sentiment into 2025" if markets get disappointed with the impact of the stimulus measures, Qazi said, adding that he didn't think the measures were enough to address China's "structural economic problems."

Investors expect the stimulus measures to "produce blockbuster growth" to the economy in the coming months, and investor enthusiasm will dampen if the package only delivers a "modest lift," Qazi added.

Shaun Rein, founder of China Market Research, predicted that "there's still 1-3 weeks room left for Chinese equities to keep going up." Still, it's not unusual for prices to drop as "investors close out positions to take wins," Rein said. Given the rally was driven by mostly sentiment, there will likely be more volatility ahead as "no one wants to be the last in, but no one wants to be the last out."

More individual investors have been incentivized to join trading, "in fear of missing a seemingly once in a lifetime rally," Ting Lu, Nomura's chief China economist said in a report on Thursday.

Also boosting the sentiment is soaring hopes that Beijing will unleash more fiscal policies and other support measures to shore up its economy. The Ministry of Finance has yet to release major policies to support growth, despite reports of such plans.

"The eventual scale and content of the fiscal package might be quite improvised and uncertain," Nomura's Lu noted in the report, adding that investors should exercise "more sober assessment" amid the recent market frenzy.

The rally in equity could be derailed if the central government's fiscal stimulus package misses expectations, according to Macquarie Capital's Hsiao. Other events that might cut the rally short include "stronger than expected U.S. job numbers implying smaller Fed rate cuts, or a Trump victory in November," he said.

China has struggled with looming deflationary pressures due to a prolonged real estate downturn and weakening domestic consumer confidence. A slew of economic data in recent months has missed expectations, raising worries among economists that the world's second largest economy may not achieve its 5% full year growth target.

Last week, the People's Bank of China moved to lower the amount of cash that banks must hold on hand, known as the reserve requirement ratio or RRR, by a half-percentage point. The central bank also cut the benchmark interest rate on seven-day reverse repurchase agreements by 20 basis points to 1.5%. 

The key focus will be on the effectiveness of further stimulus measures, said Billy Leung, investment strategist at Global X. "If policy follow-through is strong, we could see further gains, backed by a broader base of investor participation."