China’s stock market correction accelerates: Why does Morgan Stanley still prefer A-shares?
Morgan Stanley believes both Hong Kong stocks and A-shares have room for further valuation declines, but the funding and policy signals supporting the onshore market are clearer, so it continues to prefer A-shares.
Original source：Morgan Stanley Asia LimitedFirst published on Unhidea：Original source date：
Key takeaway
The pressure behind the Chinese stock market correction comes from a combination of a weakening domestic economy and global volatility. The key to Morgan Stanley’s preference for A-shares is growing onshore funding support to stabilize the market.
How fast has the correction been?
Chinese equities have fallen continuously since early August, with the decline accelerating since mid-October. As of the report, the MSCI China Index, Hang Seng Index and CSI 300 Index were down 20.3%, 9.5% and 11.4% respectively for the year; since 8 October alone, they had fallen 5.7%, 2.5% and 4.8% respectively.
On 22 October, the Hang Seng Tech Index fell 5% in a single day, its largest one-day decline that year. Morgan Stanley had previously lowered its index target on 3 September over concerns including tightening liquidity, a weakening macroeconomic backdrop and regulation.
What pressures are Hong Kong stocks and A-shares facing respectively?
Recent pressures on Hong Kong stocks include the offshore trust tax, concerns about e-commerce platform profit margins, and uncertainty surrounding global oil prices, bond yields and inflation. Morgan Stanley believes the 22 October sell-off was not primarily caused by investors raising funds ahead of the offshore trust tax payment deadline: selling by those needing to do so was more likely to have occurred earlier, although the market may fear that the deadline could trigger panic selling.
A-shares, meanwhile, are affected by weak domestic economic and consumption momentum. The bank believes that although revenue and earnings growth in AI, technology and innovation sectors has been strong, the weak macroeconomic environment leaves investors with few alternative sectors to rotate into when the technology narrative comes under challenge.
Sectors related to AI and the capital-expenditure supercycle account for more than 40% of the CSI 300, also increasing the correlation between A-shares and US equities; concerns that large IPOs could absorb liquidity have added to the pressure.
How much downside remains based on historical valuations?
Morgan Stanley estimates that the Hang Seng Index and MSCI China Index still have approximately 10%–15% downside before reaching historical valuation troughs, corresponding to a forward price-to-earnings ratio of about 8 times for the next 12 months. Hong Kong stocks will also be affected by fluctuations in global bond yields and the Federal Reserve’s policy path.
The historical valuation trough for the CSI 300 is approximately 10–11 times forward earnings for the next 12 months. The bank believes that, beyond valuations, changes in the national team’s actions merit closer attention, as they could provide a stronger signal of near-term stabilization.
What has changed in national team support?
According to Bloomberg Intelligence, funds backed by the national team bought approximately 15 billion US dollars of equities from 9 October to the 20th; Morgan Stanley says this is broadly consistent with flows into CSI 300 ETFs, which it uses as a proxy for national team buying.
Purchases have also tilted more toward growth sectors concentrated in this decline. The bank estimates that CSI 300 ETFs accounted for about 45% of purchases, down from 60%–70% previously; STAR 50 and ChiNext ETFs together accounted for about 37%–50%, up from 7%–17% previously. The STAR 50 had already fallen nearly 40% from its peak.
Stabilizing forces also include corporate share buybacks and stake increases. The term of the related relending facility was extended from one year to three years, and the required proportion of companies’ own funds was reduced from 30% to 10%. Since its establishment, the aggregate maximum amount of buyback and stake-increase loans applied for by A-share companies has been approximately 233 billion yuan, against a facility quota of 300 billion yuan.
Why does Morgan Stanley continue to prefer A-shares?
The bank values the onshore liquidity support unique to A-shares, as well as the relatively strong revenue and earnings growth of AI, hard-tech and innovative companies. By comparison, Hong Kong stocks remain more exposed to global macroeconomic conditions, financing costs and geopolitical risks.
Historically, markets have often bottomed within 1–2 months after high-profile national team buying and public statements by policymakers about stabilizing the market. On that basis, Morgan Stanley believes that, as policy statements become more supportive, stabilization in A-shares may become more apparent over the next month or two.
