Morgan Stanley: China Stocks Still Face 10%–15% Downside, Prefers A-Shares
nashnova research
Morgan Stanley's latest report sees 10%–15% further downside for offshore Chinese equities before historical valuation floors are reached, yet explicitly favors A-shares, arguing that the 'National Team's' buying structure has fundamentally shifted and a stabilization window may open within one to two months.
How much have Chinese equities fallen — and why is the sell-off accelerating?
MSCI China is down −20.3% year-to-date, the Hang Seng −9.5%, and the CSI 300 −11.4%. The Hang Seng Tech Index fell 5% on October 22 alone — its steepest single-day drop this year.
The acceleration stems from a pile-up of negatives: trust-tax selling fears, an e-commerce regulatory crackdown, weakening macro data, and rising global volatility.
Morgan Stanley had already turned cautious on September 3, cutting index targets. Fresh headwinds in the following two weeks reinforced the downtrend.
Why does the report say there is still 10%–15% to fall?
Historical valuation bands for the Hang Seng and MSCI China suggest the market needs another 10%–15% pullback to reach a forward 12-month P/E — price divided by the next year's expected earnings — of roughly 8×, the historical trough.
This means → valuations are already low, but they have not yet hit the "historical floor." Similar troughs occurred in 2008, 2015, early 2020, October 2022, and summer 2024.
For A-shares, the CSI 300 has historically experienced comparable drawdowns before touching a forward P/E of about 10–11×.
What triggered the October 22 Hong Kong sell-off?
Some market participants blamed the plunge on forced selling ahead of an offshore trust income-tax filing deadline.
Morgan Stanley disagrees: if entities needed to sell assets to pay tax, those sales were likely completed well before the date. The sell-off more likely reflected a market misread of the policy's details and timeline.
A second catalyst was a regulatory summons of major e-commerce platforms on October 21, demanding higher service standards and tighter quality checks — raising fears of margin compression.
How is the 'National Team' buying differently this time?
Per Bloomberg Intelligence, state-backed funds purchased roughly $15 billion in equities between October 9 and 20.
The mix has shifted markedly: CSI 300 stocks accounted for only 45% of estimated purchases (historically 60%–70%), while the STAR 50 plus ChiNext together made up 37%–50% (historically just 7%–17%).
In plain terms = the 'National Team' used to prop up blue-chip heavyweights. This time, it channeled money into the growth and innovation segments hit hardest — more "rescue where the bleeding is worst" than mechanical index-lifting.
What policy and buyback tools have been ramped up?
The government directed state-backed funds and enterprises to buy equities and ordered major insurers to report stock positions and avoid selling underwater holdings.
CSRC Chairman Wu Qing publicly pledged on October 19 to prioritize stability and approved the first batch of 18 actively managed ETFs, set to launch October 23.
Terms on the stock-buyback relending facility have been significantly eased: the loan tenor was extended from one year to three, and the equity contribution requirement was cut from 30% to 10%. A-share companies have filed 1,113 buyback or top-up loan applications, with a maximum amount of roughly RMB 233 billion against a total facility of RMB 300 billion.
What is Morgan Stanley's bottom line — A-shares or Hong Kong?
Morgan Stanley explicitly prefers A-shares over offshore markets, citing the 'National Team's' stabilization capacity and A-shares' higher concentration in fast-growing AI, hard-tech, and innovation names.
The firm's proprietary A-share sentiment index has sat below the 22% technical-rebound signal level for a full month; historically, in most such episodes, indices staged a meaningful bounce within one to two months.
This means → the stabilization window for A-shares may be imminent, but offshore markets remain weighed down by geopolitical risk and higher macro funding costs — the risk-reward profile of the two markets is not symmetric.
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