Morgan Stanley Drops Bearish China Stocks Call, Lifts Target 22%

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Morgan Stanley Drops Bearish China Stocks Call, Lifts Target 22%

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By Winnie Hsu

(Bloomberg) — Morgan Stanley (MS) strategists ended their bearish view on Chinese stocks, following Wall Street peers in predicting a more sustainable rally spurred by the country’s advances in artificial intelligence.

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Laura Wang and her colleagues now recommend being equalweight on the asset class, and expect the MSCI China Index to reach 77 by the end of 2025. That’s 22% higher than its earlier target, and indicates another 4% rise from Wednesday’s close. The gauge entered a bull market earlier this month.

“A structural regime shift is finally happening within China’s equity market, especially the offshore space,” the strategists wrote in a note dated Wednesday. “This makes us more convinced than we were during last September’s rally that the recent improvement in MSCI China’s performance can be sustained.”

The upgrade is a notable pivot for a firm that’s long been skeptical of Chinese stocks, and suggests a fundamental shift may be underway in how global investors approach the once-shunned market. Even in October, when China’s monetary stimulus bonanza sparked a world-beating rally, Morgan Stanley had barely budged — only scaling back its underweight position.

Chinese stocks, especially tech, are suddenly back in favor following AI breakthrough showcased by DeepSeek and President Xi Jinping’s conciliatory tone toward tech leaders. Earlier this week, Goldman Sachs Group Inc. raised its target for the MSCI China Index to 85, while JPMorgan Chase & Co. (JPM) and UBS Group AG (UBS) have also released bullish views.

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Morgan Stanley strategists mentioned efforts by companies to boost share value, including buybacks, as well as a regulatory shift from “rectification to revitalization” and China’s AI capabilities as drivers for the upgrade. They are moving from being “deeply skeptical” to “cautiously more optimistic” on the asset class, the note said.

Chinese stocks have powered ahead this year, emerging from their yearslong underperformance compared to global peers. The stunning gains, however, have prompted profit taking in recent sessions as some benchmarks entered overbought territories.

The Hang Seng China Enterprises Index (^HSCE) slipped 1.3% as of 9:50 a.m. in Hong Kong on Thursday, while MSCI China was also down as much. The two gauges are still up more than 20% from their January lows. The CSI 300 Index (000300.SS), an onshore benchmark, lost 0.1%.

Morgan Stanley also boosted targets for the Hang Seng China Enterprises Index to 8,600 from 6,970, and Hang Seng Index (^HSI) to 24,000 from 19,400. It maintained the forecast for the CSI 300 at 4,200.

“There should be ample room for global investors to engage” given limited foreign inflows so far, the strategists said. China’s deflation remains a headwind for onshore stocks in the near term, though they should catch up to offshore peers gradually, the note added.

—With assistance from Jacob Gu.

(Updates with more details from MS note, Thursday market moves)