China wants to play the long game with the U.S. What that means for Chinese stocks

Despite escalating U.S.-China tensions and market volatility, investment strategists maintain a positive long-term outlook on Chinese stocks, particularly in the tech sector, citing China's AI breakthroughs and a strategic government focus on industrial technology. The MSCI China index demonstrates improving returns, surpassing India, while Morgan Stanley tactically favors mainland A-shares over Hong Kong stocks due to the latter's U.S. correlation and profit-taking risk. Upcoming policy announcements are anticipated to detail further tech ambitions in frontier fields, with analysts expecting domestic innovation to drive market gains.

Analysis

Despite U.S.-China tensions and market volatility, investment strategists maintain a cautiously positive long-term outlook on Chinese equities, particularly in technology. WisdomTree's Liqian Ren highlights international investors' growing interest in Chinese tech, spurred by DeepSeek's AI breakthrough, as a long-term bet, supported by Federal Reserve easing.

Beijing's "AI+" strategy fundamentally shifts focus to industrial technology, with further policy support expected from the Oct 20-23 leadership meeting on AI, semiconductors, and robotics. This strategic pivot contributes to the MSCI China index's improving return on invested capital, outperforming India, especially with internet plays like Alibaba.

Chinese stocks tumbled Friday (Shanghai -2%, Hang Seng -2.5%) due to U.S. bank concerns. Morgan Stanley tactically favors mainland A-shares over Hong Kong stocks, advising against "buying the dip" in Hong Kong given its U.S. correlation and profit-taking risk.

Upcoming catalysts include China's Q3 GDP report and the detailed five-year plan, expected to reinforce domestic tech innovation. Analysts anticipate strong earnings from specific mainland tech companies like Gigadevice, Yonyou, and Inovance, highlighting targeted opportunities.

Key Decisions for Investors

• Tactically consider overweighting mainland A-shares over Hong Kong equities, given the latter's U.S. correlation and profit-taking risks
• Focus investment on quality industrial technology names with high earnings visibility and strong dividend profiles, as advised by Morgan Stanley
• Monitor China's upcoming Q3 GDP report and the detailed five-year plan from the Oct 20-23 leadership meeting for policy direction and new tech ambitions
• Evaluate specific mainland tech companies like Gigadevice, Yonyou, and Inovance for targeted long-term opportunities based on strong earnings expectations