On January 12, Morgan Stanley's Chief China Economist Xing Ziqiang shared his perspectives during a closed-door strategy session regarding the improving CPI and PPI at the beginning of 2026, the simultaneous rise in Hong Kong's property market volume and prices as a reference for mainland China's real estate policies, and the latest views on the RMB exchange rate.
Xing Ziqiang believes that by the first quarter of 2026, the RMB against the US dollar could potentially reach 6.85.
Based on certain technical details, it might even briefly touch around 6.8.
However, he also cautioned that there are some short-term seasonal factors behind this.
For instance, many export-oriented enterprises typically engage in settlement and currency exchange around the Spring Festival period, which might taper off later.
Regarding the average exchange rate target for 2026, he still believes it will likely remain in a moderate and stable state, ending the year roughly around 7 against the US dollar.
The improvement in CPI and PPI over recent months is difficult to deem sustainable.
It represents a typical uptick lacking substantial domestic demand support, not a genuine signal of breaking deflation and entering reflation.
In 2026, China's economy is highly likely to remain in the difficult process of attempting to break out of deflation.
While the cycle of relatively weak domestic demand and low prices has not yet been fully broken,
the monetary authorities will certainly learn from Japan's lessons between 1991 and 1995 and are unlikely to allow the RMB to appreciate significantly.
Furthermore, Xing Ziqiang mentioned that Hong Kong's property market has achieved simultaneous growth in volume and prices due to policy relaxation and declining interest rates.
He anticipates that Hong Kong's residential property prices will rise by another 10% in 2026, and rental levels will also increase.
This provides a reference for mainland China, suggesting that policies such as interest subsidies could be used to help stabilize the real estate market and halt its decline.
Morgan Stanley's Chief Strategist Laura Wang added that
the forecast for the Fed's two rate cuts in 2026 has been postponed to June and September, but the market reaction is not expected to be too severe.
In terms of capital flows, foreign capital recorded a net inflow of $14 billion into Chinese stock markets in 2025,
largely reversing the outflow trend seen in 2024, and she expressed full confidence that foreign capital will maintain a net inflow status in 2026.
The strong start at the beginning of the year has set a positive tone for the 2026 market.
We have observed a situation of relative stability in the East and turbulence in the West within the global geopolitical landscape; the RMB exchange rate has broken through and strengthened; the activity levels of A-shares and Hong Kong stocks are recovering;
indicators reflecting deflation, such as CPI and PPI, have recently rebounded somewhat;
including the leading indicator for the property market—Hong Kong's property market experiencing simultaneous growth in volume and prices—so the strong start has been quite lively.
Of course, behind the liveliness, everyone is still concerned about whether it can be sustained.
The core challenge for this year is to break the deflationary cycle,
allowing daily necessities and consumer livelihoods to recover more robustly, which might ultimately determine whether these signs can persist.
Therefore, today we will analyze the trends behind the strong start and the underlying concerns in light of the latest domestic and international developments.
During the strong start period, an interesting phenomenon we observed is everyone discussing the recent strengthening of the RMB exchange rate.
I believe the RMB's strength has some short-term room to run,
but is constrained by deflationary fundamentals in the medium to long term.
Particularly, China's monetary authorities will also consider some policy missteps made by Japan after it fell into deflation and a property downturn, aiming to avoid repeating the same mistakes.
So, even though the RMB has continued to strengthen against the US dollar since the start of the year, even breaking through the 7 mark.
There are also some short-term factors worth alerting everyone to,
for example, many Chinese export enterprises typically engage in settlement and currency exchange before the Spring Festival and around the New Year, converting their export profits from US dollars to RMB.
These are seasonal actions, not long-term, continuously intensifying behaviors.
Therefore, this seasonal currency exchange might later taper off and moderate somewhat,
coupled with the recent depreciation of the US dollar, leading us to judge that
by the first quarter of 2026, the RMB against the US dollar could potentially reach 6.85.
Based on certain technical details, it might even briefly touch around 6.8.
However, our target for the full-year average exchange rate has changed very little.
We still believe it will likely remain in a moderate and stable state overall, ending the year roughly around 7 against the US dollar.
What is the basis for this judgment?
I think it's mainly that domestic deflationary pressures continue to evolve.
Japan signed the "Plaza Accord" in 1985, leading to currency appreciation.
Starting from 1991, Japan's real estate bubble burst, entering a phase of economic downturn and gradual deflation.
Yet from 1991 to 1995, it still stubbornly adhered to the "Plaza Accord,"
insisting on a significant appreciation of the Yen, which directly weakened the nominal income and profitability of the tradable sector.
More importantly, it constrained the room for coordinated monetary and fiscal policy easing domestically,
causing the deflationary cycle to deepen further, ultimately leading to the "Lost Two Decades."
I believe this lesson offers some reference for the current RMB exchange rate.
We are still in a deflationary environment.
Of course, many people might say, haven't CPI and PPI improved a bit in recent months?
Are we about to exit deflation soon?
The recent temporary rebound in prices is difficult to deem sustainable.
The main reason is the lack of a clear recovery in domestic demand.
The recent strengthening of CPI for a few months
is partly driven by seasonal factors affecting food prices like fresh fruits and vegetables.
These relate to weather, supply, etc., and do not represent demand.
Another factor is gold,
which actually represents an investment demand; gold has also played a significant role in the improvement of China's CPI over the past six months.
In fact, in December's CPI increase, 0.55 percentage points came from gold.
If we exclude these seasonal items like vegetables, fresh fruits, and gold, China's core CPI actually showed no year-on-year improvement—this is a crucial point.
Additionally, the other component of deflation/inflation is industrial goods prices—PPI.
It has shown some recovery, an uptick, in recent months.
But upon closer inspection, this is mainly due to prices of some upstream raw materials,
especially non-ferrous metals. Part of this is due to international price increases in non-ferrous metals, which is imported for China.
Another part, we've seen since around May-June last year, initial steps against "involution" in some areas addressing symptoms,
such as forming some price alliances, industry associations, making concessions, reducing some capacity, which has made progress in specific upstream price areas like polysilicon.
However, midstream and downstream demand remains weak.
Currently, we do not see any signs of these upstream price increases being transmitted to midstream and downstream prices.
The automotive sector is a typical example, where price wars might even intensify.
Therefore, the recent improvement in CPI and PPI over the past few months is still difficult to deem sustainable.
It represents a typical uptick lacking substantial domestic demand support, not a genuine signal of breaking deflation and entering reflation.
While the cycle of relatively weak domestic demand and low prices has not yet been fully broken,
the monetary authorities will certainly learn from Japan's lessons from 1991 to 1995 and are unlikely to allow the RMB to appreciate significantly.
But what is a very positive signal here?
It is that Hong Kong Special Administrative Region, as a city in China, has seen its property market experience simultaneous growth in volume and prices.
This significant warming could provide some reference for the mainland's upcoming real estate policies.
In 2025, Hong Kong property transaction volume increased by 18%, and values are also recovering—volume and prices rising together.
It is predicted that Hong Kong's residential property prices will rise another 10% in 2026, and rental levels will also increase.
The core logic behind this involves two main points.
One is the policy level.
Since 2023, Hong Kong has relaxed policies as much as possible, basically removing all purchase restrictions.
It has also complemented this with household registration policy relaxations, meaning easing immigration controls and optimizing talent policies.
The second, very important point is that Hong Kong has been quite proactive in reducing mortgage interest rates.
This is also partly due to its linked exchange rate system, coinciding with the Fed's rate-cutting cycle.
Over the past two years, Hong Kong's mortgage rates have declined significantly, noticeably narrowing the gap with rental yields.
Especially since 2025, in many Hong Kong properties, the mortgage interest cost has become cheaper than the rent.
Hong Kong real estate agents persuading you to buy property say that your monthly mortgage payment is cheaper than rent,
so of course, it's better to buy than rent—this is a very powerful sales pitch.
All these factors have improved real estate demand, achieving a recovery in volume and prices, offering insights for the mainland property market.
Relaxing purchase restrictions in some core cities, and relaxing household registration and immigration systems, might need to be done more comprehensively rather than piecemeal, truly relaxing as much as possible.
Currently, the rental yield in China's major cities is only about 2%.
If mortgage rates are above 3%, it's difficult to improve real estate demand.
This is why we have repeatedly proposed over the past six months that achieving stabilization and halting the decline in real estate requires three major relief strategies: absorbing inventory, protecting developers, and subsidizing mortgages.
Among these, subsidizing mortgages could be a breakthrough measure.
If we subsidize mortgage interest by 100 basis points or more,
we could effectively narrow the gap between mortgage costs and rental yields in some mainland core cities, similar to Hong Kong.
This would improve ordinary people's expectations for buying property.
So, what is our core logic?
The strong start at the beginning of 2026 certainly has its underlying reasons.
Particularly, the current relative stability in the East and turbulence in the West in geopolitics, and the gradual demystification of the US dollar, leading to diversified global asset allocation.
This also includes another trend we discussed last week—the ongoing reassessment of China's vast potential in technology innovation and industrial upgrading capabilities.
However, specifically regarding this year's core challenge—breaking deflation and restoring a positive cycle for daily necessities and consumer livelihoods.
Currently, it seems we cannot be complacent about the early-year improvements in CPI and PPI and the signs of RMB strength; we need to observe cautiously.
Especially for real estate, we should learn from Hong Kong's property market experience and more vigorously introduce interest subsidy policies.
It might only be after the Two Sessions that there is a possibility of more concrete selection of some cities for pilot programs.
These are some preliminary thoughts I offer to stimulate discussion; for specific stock market strategy, please let Laura introduce it.
Morgan Stanley Chief China Strategist Laura Wang:
I think the first point to emphasize is that our US economics team has once again adjusted their forecast for the Fed's rate cut schedule this year.
Previously, we said there would be two rate cuts this year, in January and April.
Now, due to overall data uncertainty,
we believe there will still be two rate cuts this year, but the schedule has been significantly delayed.
Currently, we forecast the two rate cuts this year to occur in June and September.
Will such a rate-cutting cycle bring major changes to the market?
I don't think it needs to be overinterpreted.
First, our latest forecast for Fed rate cuts in June and September
is actually quite consistent with the rate-cutting cycle already priced in by the market.
Therefore, the market reaction should not be too剧烈.
Second, for US stocks and global stock markets this year, although we at Morgan Stanley have consistently emphasized that 2026 is a big year for stocks,
our very optimistic view on stocks is not predicated on predictions of excessive liquidity leading to significant valuation expansion.
Our expectations for valuations actually involve slight declines.
It's not reliant on extremely abundant liquidity drastically stimulating further valuation inflation.
Meanwhile, our team conducts a very detailed monthly analysis of net capital inflows and outflows.
We just released data for overall net inflows in December,
showing that the attractiveness of Chinese stocks to foreign capital maintained a net inflow status.
For the full year of 2025, the total net foreign capital inflow attracted by Chinese listed companies was $14 billion.
Interpreting this $14 billion within the context of the past few years, its importance and magnitude are, I think, self-evident.
Compared to the full year of 2024, when we had a net outflow of $17 billion.
So, 2025 has already seen a reversal and inflow.
We also expect to further maintain a net foreign capital inflow status in 2026, and we are fully confident about this.
Furthermore, regarding overall capital trends,
apart from seeing foreign capital maintaining net inflows into China,
the net inflow trend into other markets and regions, including the Taiwan region of China and South Korea, is also very significant.
These two places each recorded net inflows exceeding $2 billion in December.
So currently, at the start of the year, we feel the relatively weaker link might be corporate earnings.
We need to see what adjustments need to be made after the Q4 and full-year financial reports are released.
But aside from that, regarding the short-term RMB trend, the strong start in capital markets,
global capital inflows, investor sentiment, risk appetite, and the directional allocation across global markets,
we believe maintaining a cautiously optimistic attitude towards Chinese stocks is entirely justified.
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