As the second quarter progresses, international investors are turning their attention to China's economic outlook for the latter half of the year. Morgan Stanley has comprehensively upgraded its projections for China's economic growth, corporate earnings, and equity market performance.
In its latest mid-year economic outlook for China, Morgan Stanley has raised its forecasts for the country's real GDP growth to 4.8% for 2026 and 4.7% for 2027, representing an increase of 0.1 percentage points for each year compared to previous estimates.
The core rationale for the upward revision lies in the global acceleration of AI development and energy transition, with China positioned as one of the primary beneficiaries. The chief China economist at Morgan Stanley noted in a recent briefing that China's economic recovery is exhibiting "K-shaped" characteristics, characterized by robust performance in exports and high-end manufacturing, while domestic demand, consumption, and the property sector continue to undergo adjustments. Growth is being jointly driven by exports, AI, and energy investments.
Recent high-level meetings between Chinese and U.S. leaders have drawn global attention, with the trajectory of the two economies becoming a focal point. Regarding this, the economist stated, "Exports remain a long-term bright spot for the Chinese economy. Regardless of shifts in the international geopolitical landscape, the advantages of China's industrial chain are already very pronounced. This year, global events have highlighted the importance of supply chain security, and China holds a competitive high ground."
On the strategy front, Morgan Stanley expressed a preference for A-shares over offshore markets, recommending a thematic stock selection approach rather than passive index investing.
**AI and Energy as Growth Drivers**
Overall, the economist believes the Chinese economy will demonstrate "stable aggregate growth with structural divergence," with the recovery mirroring a "K-shape"—strong export performance contrasted with ongoing adjustments in domestic demand sectors like consumption and real estate.
Beyond exports, AI and energy are identified as two significant forces propelling economic growth. China is deeply benefiting from the convergence of two global "investment super-cycles" in AI and energy security/transition. AI and energy are expected to form the dual investment themes for the next phase in Chinese markets and serve as primary drivers of economic growth.
Regarding AI, the economist noted that since 2025, the Chinese market narrative has significantly incorporated and strengthened a "technology story" alongside liquidity considerations. Observing global trends, the economist pointed out that with the emergence of AI Agents since last November, AI has entered a 2.0 phase, making the technology narrative in China increasingly clear.
The analysis detailed that since September 2024, policy measures have injected strong support for market liquidity. Following the stabilization of market fundamentals over the past year, the technology narrative in China has gained solid footing, marked by the rise of domestic large AI models and advancements in next-generation batteries, energy storage, and humanoid robotics within the advanced manufacturing sector.
Furthermore, China holds advantages in AI hardware and excels in supporting sectors like energy and power, which are crucial for AI development. Specifically, global events since 2026 have underscored the importance of energy security, accelerating the global transition to new energy sources. Among major global economies, China stands out as one of the highest beneficiaries from these two cycles, particularly showcasing strengths in the energy transition field.
"Especially after the surge in global oil prices, major economies find it increasingly difficult to bypass China, relying heavily on equipment, technology, and related products supplied by China. This contributes to the overall enhancement of China's energy industry chain strength," the economist added.
On the economic recovery, the view is that a clear "K-shaped" divergence is evident. On one hand, strong export performance and a robust industrial chain are current highlights; on the other, domestic consumption demand remains relatively sluggish, and the deep adjustment in the real estate market is not yet complete.
"As the current strong export sectors are predominantly capital-intensive industries, and given the sheer size of the Chinese economy, the 'spillover effect' of export gains translating into domestic employment, income, and consumption is relatively slow," the economist mentioned.
Regarding stimulus policies, the economist anticipates that strong export performance can support the achievement of macroeconomic targets. Therefore, it is expected that the central bank's policy stance will remain balanced in the second half of the year.
**Comprehensive Upgrade of Chinese Equity Index Targets**
Based on this optimistic macroeconomic outlook, Morgan Stanley's strategy team has concurrently raised its expectations for A-share earnings and index targets.
In a recent report, the team modestly increased its MSCI China 2026 earnings growth forecast to 7% (from 6% previously) and raised its target for the CSI 300 Index to 5400 points by the second quarter of 2027, implying an approximate 11% upside potential.
"We continue to prefer A-shares over offshore markets," stated Morgan Stanley's chief China equity strategist. The rationale is that the A-share market has a higher concentration of high-end upstream manufacturing and hard-tech companies. Additionally, potential A-share IPOs could significantly boost participation from domestic investors. Furthermore, supportive funds are expected to provide backing when necessary.
Simultaneously, Morgan Stanley anticipates a mild improvement in the profit outlook for Chinese companies. The strategist noted that alongside improving earnings growth and Chinese companies gaining more dominance in the global high-end supply chain, a marginal re-rating of valuations is possible.
Based on these assessments, Morgan Stanley holds a more favorable view of A-shares compared to offshore markets and advises employing a thematic stock selection strategy over passive index investing.
Regarding investment opportunities in the Chinese market, the strategist believes the Chinese equity market offers numerous opportunities at the individual stock and thematic levels, supported by solid market fundamentals and clear investment themes such as technological import substitution and high-end manufacturing.
In terms of investment targets, Morgan Stanley particularly recommends high-quality companies with strong technological and innovation capabilities. The reasoning is that such investment targets align more closely with China's national development plans and possess the potential to expand their global footprint while addressing needs related to energy security and efficiency.
