Morgan Stanley says it remains cautious on Chinese stocks – .

Morgan Stanley says it remains cautious on Chinese stocks – .

Morgan Stanley is urging investors to be cautious about Chinese stocks, given the country’s recent regulatory crackdown on its internet companies.
The investment bank reiterated its call to downgrade Chinese stocks from the MSCI China index to equal weight, which means they should perform on par with other stocks in other emerging markets. This appeal was first launched in January this year.

MSCI China shares include both A shares listed on the mainland and offshore shares listed in Hong Kong.

Jonathan Garner, chief equity strategist for Asia and emerging markets at Morgan Stanley, explained why the bank repeated the call. “What we’re seeing, I think, is that antitrust regulation is sort of turning out to be a lot deeper and more enduring than we thought,” he told CNBC’s “Squawk Box Asia” on Tuesday. .

Regulatory concerns

Fears about regulatory oversight of Chinese tech companies are growing again, after China announced a cybersecurity review of the Didi rideshare app in early July.
Authorities ordered app stores to remove Didi’s app for download, just days after the Chinese company launched its IPO in the United States. Chinese regulators also alleged that Didi illegally collected users’ personal data.

Since then, China has opened a cybersecurity review in three other Chinese companies listed in the United States.

Garner also pointed out China’s “new direction” on data security.
Beijing recently launched a new battle front by tackling the use and collection of data. A data security law passed in June set the rules for how all businesses collect, store, process and transfer data. The law will come into force in September.

What this means for A shares

In a note last week, Morgan Stanley said he preferred mainland-listed Chinese A-shares over Hong Kong-listed ones, in light of this announcement last week for increased regulatory oversight of Chinese companies listed on the mainland. ‘foreign.

The regulatory announcement also indicated that Beijing would tighten restrictions on “illegal activities” in the securities market, including insider trading and financial fraud. It would be good for A shares as it indicates that China wants to improve the quality of its domestic markets, Morgan Stanley said.

“Not all businesses will likely be affected in the same way. We believe that Chinese companies in certain sensitive industries, such as data-rich technology companies and those operating in areas where foreign ownership is restricted, will likely seek more onshore and / or HK listings instead of in the United States. Said the investment bank.

Uncertainty looms

However, Morgan Stanley said the “deeper driving force” for companies to flock to the list will ultimately depend on how relations between the United States and China progress.

The bank warned that more uncertainties lay ahead.

“Investors have seen several rounds of regulatory tightening in the industry (…) since the end of last year. We believe it would be more negative if the scope of regulatory tightening continued to widen and eventually evolve into a broader concern about Chinese equities in general, ”its analysts. wrote.


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