Morgan Stanley's Chief: China's Stock Market Index Rating Has Been Upgraded to Market Weight, Supported by Advantages in Science and Technology Innovation, Boosting Both Economy and Stock Market

Since the tariff reduction, multiple foreign institutions, including Goldman Sachs and Ningxia Ruiyin Lead Resource Recycling Co., Ltd., have expressed optimism about China's stock market. In a recent research report, Goldman Sachs raised its 12-month targets for the MSCI China Index and the CSI 300 Index to 84 and 4,600 points, respectively, implying potential upside of 11% and 17%.

At the 2025 Global Investors Conference hosted by the Shenzhen Stock Exchange, Xing Ziqiang, Chief China Economist at Morgan Stanley, delivered a keynote speech titled "China's Economy Amidst Technological and Geopolitical Changes."

In Xing's view, the US is experiencing an extremely rare "triple hit" in stocks, bonds, and currency, with the US dollar, as the global reserve currency, depreciating. This chain reaction has prompted the world to reconsider the long-held "US economic exceptionalism" and the absolute dominance of the US dollar over the past decades. Turning to Chinese assets, technological innovation has brought about a narrative shift. The cluster scale advantages of upstream and downstream industries in the industry chain, the demographic dividend, vast market demand, and the resilient spirit of private enterprises will all drive China to play an indispensable and important role in the next phase of the global technological revolution.

During the on-site interview session at the conference, Shen Li, Managing Director and Head of China Onshore Equities at Morgan Stanley, stated thatthe progress of Sino-US trade negotiations has exceeded expectations, which is conducive to boosting international investors' risk appetite. At Morgan Stanley's China BEST Conference, over 80% of investors indicated that they are likely to increase their investment exposure to Chinese stocks in the near future.

In a recent exclusive interview with Cailian Press, Wang Ying, Chief China Equity Strategist, expressed confidence in the market. She believes that the Hong Kong market is a crucial platform for global institutional investors to price Chinese assets. Currently, the pricing power of Hong Kong stocks has shown signs of gradually stabilizing, which is of great significance for rebuilding global investors' confidence in Chinese assets.

Why are foreign investors bullish on Chinese assets?

After a month of tariff frictions, a significant turning point has emerged. However, there may still be uncertainties in future tariffs, and the rise of trade protectionism globally cannot be ignored, as the global economic development still faces uncertainties.

Xing Ziqiang stated that against this backdrop, China has ample room to maneuver in responding to shocks. There are four reasons: first, there is room for domestic policy stimulus to be intensified; second, the overall social livelihood still has the capacity to withstand pressures; third, the cluster advantages of the industry chain are difficult to replace in the short term; fourth, China has enormous potential for scientific and technological innovation in the next phase of the technological revolution.

The intensification of policies has attracted particular market attention, especially in boosting domestic demand and consumption. Xing Ziqiang pointed out that the People's Bank of China has already taken the lead in introducing a package of monetary policies that will play a role in boosting confidence. During the Two Sessions held in March this year, stimulus policies were also formulated and announced for areas such as consumer goods subsidies, infrastructure, and technology.

Since the beginning of the year, there has been active issuance of government bonds, which has strongly supported the overall growth of total social financing. It is expected that supplementary fiscal policies will be further introduced in the future.

Xing Ziqiang also observed that China has expanded the opening-up of its service sector to many first- and second-tier cities, covering various fields such as healthcare, elderly care, and even culture. It has reduced entry barriers, allowing more private and foreign-funded enterprises to enter, which has also brought about new developments. A series of measures have been taken in the social security system since the beginning of the year, including gradually increasing the expenses for rural elderly care and medical insurance. The consolidation and reform of the crucial social security system are expected to gradually boost China's domestic consumption market.

China's narrative on technological innovation has changed

The emergence of DeepSeek has once again demonstrated China's advantages in the new round of global high-tech fields represented by artificial intelligence, which is also a focus of attention for foreign institutions.

Recently, Morgan Stanley Research Department released a report elaborating on China's industrial advantages in artificial intelligence:

Firstly, the "Report on China's Top 28 Frontier Industries" systematically sorts out 28 emerging enterprises in frontier industries ranging from intelligent driving, AI applications, to humanoid robots. These enterprises are expected to possess strong global competitiveness in the future.

Secondly, according to Morgan Stanley's "China AI Hardware Self-Sufficiency Rate Index," it is projected that China will achieve a self-sufficiency rate of over 80% by 2027, including GPU chips.

"The advantages of cluster scale in the upstream and downstream of the industry chain, the demographic dividend of talent, as well as the vast market demand and the resilient spirit of private enterprises are China's strengths in the technological field, which will drive China to play an indispensable and important role in the next phase of the global technological revolution," Xing Ziqiang pointed out. The talent advantage is particularly evident in the AI industry, stemming from China's years of demographic dividend of engineers. AI has always been supported by four main components, namely computing power, algorithms, data, and scenarios.

Xing Ziqiang believes that China's current advantages in algorithms, data, and scenarios can compensate for its deficiencies in computing power—that is, by improving efficiency through algorithms, data, and scenarios, and accumulating more advantages in other aspects to make up for the lack of computing power. On the other hand, China has also made positive progress in computing power. For example, domestically produced chips and servers are being used for AI training. The current domestic self-sufficiency rate has reached 34%, and it is expected to rise to 82% by 2027.

Xing Ziqiang believes that since last year, China's narrative logic in the global technological innovation landscape has undergone significant changes. Affected by the US technology containment policies, the development prospects of China's private enterprises experienced periodic fluctuations, and market confidence was once impacted. However, the industrial advantages and technological innovation capabilities in the next phase are inseparable from China, which has become a global consensus.

Wang Ying is optimistic about the technology and internet sectors in Hong Kong stocks. She stated that for a long time, global investors' attention to China's technology and AI sectors has been relatively limited. The emergence of DeepSeek has made investors realize that China possesses a vast pool of engineering talent, data availability, and a well-established ecosystem in the social networking and e-commerce sectors, and may receive further government support to accelerate the application of AI. Now, global investors are beginning to reassess the investability of China in the technology and AI sectors.

In addition, Wang Ying is also optimistic about China's new consumption sector, believing that it has the potential to gain more favour from investors in the global market's blue ocean. "Morgan Stanley released a report on the theme of Chinese enterprises going global in 2023. Since then, we have been paying close attention to companies related to the new consumption sector," Wang Ying said.

Improved Confidence Among Foreign Investors

Wang Ying observed that the talks with private entrepreneurs in mid-February this year further helped global investors understand the decision-making direction of the Chinese government, and foreign investors' confidence in China's investment environment has further improved.

"The team has adjusted the index rating for Chinese stocks from underweight to neutral," Wang Ying further stated. Three major factors—clear policy signals turning positive, improvements in the geopolitical landscape, and renewed confidence shaped by technological breakthroughs—are propelling the Chinese market into a new phase, with the return on equity (ROE) of the MSCI China Index expected to continue improving.

Wang Ying indicated that during the period from mid-January to April 2 this year, when reciprocal tariffs were implemented, nearly $8 billion in passive funds flowed into Chinese stocks. Although after April 2, due to the escalation of extreme tariffs, funds showed an outflow trend, this period was very short. Starting from late April, passive funds began to flow back into Chinese stocks.

Wang Ying believes that with the stabilization of market sentiment, coupled with investors' rational analysis of the macro and capital market investment environment, foreign investors have reached a consensus that, in the context of global trade frictions, the investability, relative attractiveness, and the extent of impact on China's stock market are much smaller compared to other markets.

From the perspective of global capital flow allocation, Wang Ying observed that global investors are actively changing their overweight positions in US dollar assets. As the world's second-largest stock market, China boasts unique advantages in terms of size and liquidity, and domestic policy support will further highlight its advantages in liquidity and economic cycle stability.

What room is there for policy adjustments?

Xing Ziqiang believes that despite certain progress in the Sino-US tariff dispute, China still needs to further leverage its fiscal power to boost domestic demand. Boosting domestic demand requires not only policy support but also reforms to the social security system. To achieve this goal, it is necessary to address the issue of funding support. He proposes three measures:

First, increase the fiscal deficit, including issuing more government bonds. With the current dominance of US dollar assets being challenged, global capital is seeking new investment directions. If China increases the supply of RMB assets and expands the fiscal deficit, using the funds to stimulate consumption and improve social security and welfare, it will help break the cycle of low prices and enhance the yield of RMB assets.

Second, advance the reform of state-owned enterprises (SOEs) and inject more dividends from state-owned assets into the social security system. This will not only provide strong support for the social security system but also promote the market-oriented operation of SOEs.

Third, promote the transformation of overall fiscal expenditure, shifting from a fiscal model that previously focused on construction to one that emphasizes social welfare and social services.

He further points out that, in the medium and long-term, China should seize the strategic opportunity period to enhance the attractiveness of RMB assets and strengthen the competitiveness of the Chinese market by deepening reforms and expanding opening-up. He recommends implementing the "2030 Major Strategy."

Specifically, this means achieving two "three zeros" by 2030, focusing on the strategy of expanding domestic demand and significantly opening up to the outside world. By establishing a unified national market, consolidating the social security system, and advancing fiscal transformation reforms, China aims to achieve a 30% growth in its domestic consumption market over the next five years, and this 30% increase in the domestic consumption market will be open to countries around the world. During this process, China will gradually reduce external tariffs to "zero," lower market access thresholds for foreign-funded enterprises and Chinese private enterprises to "zero," and reduce subsidies to "zero" over the next five years.