Morgan Stanley predicts offshore Chinese equity markets could fall an additional 10% to 15% before state-backed buying triggers a market bottom within one to two months. The forecast comes during a difficult year for Asian equities, following similar pressures seen when Goldman Sachs cut South Korea's KOSPI target 25%.
Earnings Pressure and Valuation De-Rating
The CSI 300 entered a bear market last week and is down 13.44% in 2026, while Hong Kong's Hang Seng index has shed 11.87%. In a note reported by Bloomberg, Morgan Stanley stated that offshore equities could drop further to reach historical valuations of about 8 times forward earnings. Mainland shares are projected to de-rate to 10 to 11 times forward earnings, down from the CSI 300's current 11.6 times multiple, while the Hang Seng currently trades at 9.5 times.
Weak earnings continue to lower valuation floors. Bloomberg data shows 2026 profit forecasts for MSCI China members have fallen more than 4% since the end of March, with reported results missing estimates by 9% on average. Facing weak spending and price wars, Stanley Tang of Sumitomo Mitsui DS Asset Management noted a preference for Japanese, Korean, and Taiwanese firms over mainland Chinese stocks.
State Intervention and Bottoming Timeline
Beijing's state funds, known as the "national team," hold the key to market timing. Morgan Stanley observed that markets historically bottom one to two months after high-profile national team purchases combined with public stabilization pledges. Lead state investor Central Huijin retains about $188 billion in remaining capacity, according to Bloomberg Intelligence estimates.
"This more proactive messaging and still ample dry powder, based on historical experience, suggests that stabilization of the A-share market could be more visible now, likely within another month or two, or so," Morgan Stanley wrote. Historical precedents show that Central Huijin pledged more ETF buying in early 2024 after the CSI 300 reached a five-year low, whereas the 2015 crash bottomed a year after roughly 1.24 trillion yuan in state buying. While Bridgewater's China arm sees third-quarter declines as liquidity-driven, Ulrich Urbahn of Berenberg warned that "it is too early to conclude that the worst is over." Hong Kong also faces sensitivity ahead of the Federal Reserve's October 28 interest rate decision amidst broader macro trends like soaring federal debt projections.
Key Takeaways
- Further Downside: Morgan Stanley expects offshore Chinese stocks to fall another 10% to 15% to 8 times forward earnings.
- Year-to-Date Performance: In 2026, the CSI 300 has dropped 13.44% while the Hang Seng has lost 11.87%.
- State Support: Central Huijin retains an estimated $188 billion in dry powder to stabilize mainland markets.
- Bottom Timeline: Historical trends suggest market stabilization occurs within one to two months of state intervention.
Why It Matters
The ongoing decline in Chinese equities illustrates how persistent earnings misses can override initial policy support until state intervention scales up. While state reserves at Central Huijin provide substantial backing, market floors typically require both coordinated capital deployments and credible public commitments. A confirmed bottom in Chinese stock benchmarks would remove a significant headwind for broader emerging market assets and global risk sentiment.
