Morgan Stanley: "Animal spirits" return to the Chinese stock market, but currently limited to the technology industry.

On February 21, Morgan Stanley released a research report stating that recent technological breakthroughs, last week's private enterprise symposium, and Alibaba's strong capital expenditure investment plan are early signs of the return of "animal spirits," but this spirit is currently limited to the technology industry. Morgan Stanley pointed out that last week's private enterprise symposium focused on technology, with emerging industries such as artificial intelligence, Siasun Robot & Automation, and autonomous driving taking center stage. Morgan Stanley believes that this policy shift reflects a reordering of China's economic development priorities, with the technology industry gradually becoming a new engine driving economic growth. Morgan Stanley also stated that Alibaba announced a strong capital expenditure plan - investing over 380 billion yuan over the next three years in building cloud and AI hardware infrastructure, exceeding the total amount invested in the past decade. This also sets a historic record for the largest investment by Chinese private enterprises in cloud and AI hardware infrastructure construction. This aligns with the views of Morgan Stanley technology analysts, who believe that domestically cost-effective large-scale language models (LLMs) are reducing training and inference costs, which will accelerate the adoption and application of related technologies. The research report also stated that manufacturing activity in China remains strong, with road freight volumes proving this; a key driver of manufacturing activity may still be resilient exports. Meanwhile, consumer spending remains stable with the support of the trade-in program. Morgan Stanley no longer bearish on Chinese stocks: structural changes have arrived Last week, Morgan Stanley's strategists abandoned their previous bearish view on the Chinese stock market and expected that with the boost of China's artificial intelligence development, the Chinese stock market will see a more sustainable rise. Morgan Stanley's Chief China Stock Strategist Laura Wang and her team upgraded the rating of the MSCI China Index to equal-weight in the research report. Morgan Stanley expects the MSCI China Index to reach 77 by the end of 2025, a significant increase from the previous target of 63. Morgan Stanley also raised the year-end target for the Hang Seng H-Share Index ETF from 6970 points to 8600 points, the year-end target for the Hang Seng Index from 19400 points to 24000 points, while maintaining the target for the Shanghai-Shenzhen 300 Index at 4200 points. The strategists at Morgan Stanley wrote in the research report that there has been a structural change in Chinese stocks - especially in the offshore market, "which makes us more confident than during the rebound in September last year that the recent recovery performance of the MSCI China Index can be sustained." For a company that has been cautious about Chinese stocks in recent years, this rating upgrade is a notable turning point, indicating a fundamental shift in global institutional investors' attitudes towards the Chinese market. Morgan Stanley's strategists pointed out that efforts by Chinese companies to boost stock prices (including buybacks), the shift from regulatory crackdown to revitalization, and China's AI technological capabilities are all factors driving the ratings upgrade. The report stated that the emergence of DeepSeek has made investors realize that the application of AI may require large-scale investment. At the same time, China also has a large pool of engineers, data availability, a well-established ecosystem in social networks and e-commerce, and may receive further government support to accelerate the application of AI. Foreign institutions remain optimistic about the Chinese market In fact, voices on Wall Street that are bullish on Chinese assets have been growing. With DeepSeek's groundbreaking progress causing a sensation in the global market, several investment banks on Wall Street have recently taken a more optimistic view of the Chinese stock market. Goldman Sachs Chief China Stock Strategist Jinning Liu and his team expect that with the emergence of DeepSeek driving optimism about China's technological progress, the Chinese stock market, after a strong rise recently, is poised to rise further. The Goldman Sachs team raised the future 12-month target for the Shanghai-Shenzhen 300 Index from 4600 points to 4700 points, providing an upside potential of 19%. Goldman Sachs believes that the appearance of DeepSeek R1 and other Chinese AI models has changed the narrative of Chinese technology; improvements in growth prospects and potential confidence boost could increase the fair value of Chinese stocks by 15% to 20% and potentially bring in over 200 billion USD of portfolio inflows. HSBC also raised its view on Chinese stocks from neutral to overweight. Kang Zheng, Chief Investment Officer of HSBC Global Private Banking and Wealth Management China, said that the success of DeepSeek has demonstrated China's underestimated ability in achieving significant technological innovation. "Unique drivers such as China's AI revaluation, higher potential risk-adjusted returns, foreign investors' relatively conservative positions in Chinese stocks, and significant valuation discounts of Chinese stocks are making the Chinese market more attractive." UBS Securities China Stock Strategy Analyst Lei Meng stated that DeepSeek, by achieving world-leading large-scale models at a low cost, has brought China's innovation back into focus for global investors. "We have noticed that sectors highly associated with the AI theme such as computers, automobiles, electronics, etc., have seen a significant increase in valuations after the Spring Festival, pushing the proportion of trading volume in the big tech sector to a historical high. In the medium term, this theme may experience pulse-like upward trends as fundamentals improve, more applications are realized, and the valuations are unlocked."