Morgan Stanley: Chinese stocks may fall another 10-15%

The year has been tough for Chinese stocks: the CSI 300 has lost 13.44% since the beginning of 2026, the Hang Seng 11.87%, and Morgan Stanley does not believe the sell-off is over. Last week, the CSI 300 entered a bear market. In a Sunday note reported by Bloomberg, the bank forecasts a further decline of 10–15% in offshore stocks to a historical valuation of around 8 forward earnings. Mainland stocks are expected to see a similar revaluation to 10–11. Currently, the CSI 300 is trading at 11.6 forward earnings, and the Hang Seng at 9.5.

Pressure on Earnings

Weak results are increasing the pressure. According to Bloomberg, earnings forecasts for MSCI China participants for 2026 have fallen by more than 4% since the end of March, and actual results have been on average 9% below estimates. The squeeze is caused by weak consumption and pricing conflicts, as shown by CATL's earnings miss. Stanley Tan of Sumitomo Mitsui DS Asset Management prefers Japanese, Korean, and Taiwanese companies due to stronger earnings.

Beijing Buyers Will Determine Timing

Despite weak earnings, Beijing has maintained restrained stimulus, keeping growth within target indicators. To stabilize the market, authorities rely on state funds known as the "national team." Morgan Stanley's timeline is based on these purchases: markets typically bottom out one to two months after significant purchases by the "national team." This pattern worked when policymakers publicly promised to stabilize stocks. According to Bloomberg Intelligence, leading state investor Central Huijin had about $188 billion left last week.

"More proactive rhetoric and still significant funds, judging by historical experience, suggest that stabilization of the A-share market may become more noticeable now – likely within another one to two months," the note says. The bank favors mainland stocks partly due to this support.

How Past Rescues Worked

In early 2024, Central Huijin promised to increase ETF purchases after the CSI 300 hit a five-year low; the index rebounded from this level. In 2015, the market bottomed out only a year after approximately 1.24 trillion yuan of state purchases.

Bridgewater's China division believes the decline in Q3 is mainly related to liquidity, and valuations are low. Ulrich Urban of Berenberg remains cautious, citing weak profitability: "It's too early to say the worst is over."

Hong Kong is awaiting the Fed's decision on October 28, given its sensitivity to bond yields. Q3 results continue to come in: MSCI China is heading for the second-worst miss in two years.