China’s 2025 Growth Target Gets Boost from Morgan Stanley, AI Optimism Rises

Morgan Stanley Hikes China Forecast as Beijing Unleashes New Stimulus

Morgan Stanley (MS) joined a growing wave of optimism over China’s economic outlook. On Monday, March 24, the US investment bank raised its 2025 GDP growth forecast to 4.5%, up from a previous 4.0%.

The upgrade follows a recent Organization for Economic Co-operation and Development (OECD) report, which identified Canada, Mexico, and the US as potential losers in a 10% bilateral tariff scenario while suggesting China’s economy could emerge unscathed.

The upward revision comes despite President Trump’s recent tariffs on China and the potential for higher tariffs next week. In contrast, S&P Global projected a slowdown to 4.1% GDP growth in 2025 under a 10% US tariff scenario. However, policy commitments and evolving economic trends since late 2024 have altered the outlook.

Key Developments: Policy Support and Domestic Demand

Beijing’s policy signals suggest resilience after 5% year-on-year GDP growth in Q4 2024. On March 24, CN Wire reported fresh 2025 pledges from China’s Ministry of Finance, including:

• More proactive fiscal policy.
• Increase fiscal deficit ratio.
• Significantly optimize spending structure.
• Boost fiscal transfers to local governments.
• Support the comprehensive expansion of domestic demand and boost consumption.

China’s 2025 GDP growth target of around 5% reflects confidence that a renewed US-China trade war would not derail its trajectory. Policy measures aiming to drive domestic consumption have been a key focal point for policymakers.

China’s Economic Transition Draws Focus

Upward trends in retail sales would support Beijing’s target. The emergence of other manufacturing superpowers has pressured China to accelerate its pivot from an export-driven to a consumption-led economy.

Jostein Hauge, assistant professor at the University of Cambridge, commented on the emergence of new manufacturing powerhouses:

“After China, who is going to emerge as the next manufacturing powerhouse? My bet is on Vietnam.”

Hauge shared posts from Glenn Luk, Healthcare Inc. co-founder and BoD, who stated:

“China’s comparative advantage in broad manufacturing is still powerful, so up to now the exodus of certain manufacturing segments has been a trickle. But China is fighting this powerful LT demographic force of a shrinking blue-collar labor force.”

Recent economic data from China suggest monetary and fiscal policies are gaining traction. Retail sales increased 4% year-on-year in January and February, up from 3.7% in December.

Labor market fragility, however, could hinder consumption. China’s unemployment rate rose from 5.1% in January to 5.4% in February, while consumer confidence remained near record lows in December 2024.

Youth unemployment painted a gloomier picture, climbing to 16.9% in February, up from 16.1% in January.

AI Crucial for Long-Term Growth Prospects

Meanwhile, improving business sentiment may aid job creation and revive consumer confidence, potentially driving consumption. Alibaba Group (09988.HK) chairman Joe Tsai boosted hopes of falling unemployment on March 25, reportedly saying:

“Clear signs of business entrepreneurs being more confident since January, since President Xi met with private businesses. Company plans to re-start hiring after reaching bottom of business cycle.”

Tsai’s comments highlight China’s advancements in AI, a potentially long-term growth driver. Echoing this, Bank of England Governor Andrew Bailey emphasized AI’s transformative economic potential, stating:

“We must facilitate the growth of AI as the most likely general purpose technology which can move the needle on growth in the economy.”

Hang Seng Index Outperforms Mainland China’s Equity Markets

AI optimism has helped propel the Hang Seng Index, which has gained 16.69% year-to-date (YTD) despite a pullback from a March 19 three-year high. In contrast, the CSI 300 is flat, and the Shanghai Composite Index is up just 0.61%.

Tech giants Alibaba (09988.HK) and Baidu (09888.HK) have contributed to Hang Seng’s gains, with YTD returns of 56.92% and 11.85%, respectively.

Brian Tycangco, editor/analyst at Stansberry Research, dismissed concerns over fading stimulus and China’s market outlook:

“Some are saying China’s bull market is in danger of ending because of risks that stimulus will disappoint. Well, I don’t think so. PBoC has plenty of room to stimulate if the need arises. And I’ve noticed that they are more sensitive to market developments these days than they were 5 to 10 years ago.”

Looking Ahead: Stimulus and Trade Risks

Markets now await concrete stimulus to match Beijing’s latest pledges. Policies that boost jobs and consumption could push the Hang Seng Index toward 30,000 for the first time since February 2021.

However, Hong Kong and Mainland China investors face ongoing risks. An escalation in US-China tensions or silence from Beijing could also test demand for Hong Kong and Mainland China-listed stocks.

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