Core Viewpoint - Morgan Stanley has raised its GDP growth forecast for China to 4.5% for this year, along with an upward adjustment of stock index targets, suggesting that selective stock and sector investments can yield excess returns [2][3]. Economic Outlook - Morgan Stanley's chief economist for China, Xing Ziqiang, noted a moderate adjustment in the economy due to a pause in trade frictions, while challenges in real estate and consumption persist. The GDP growth forecasts for this year and next have been raised from 4.2%/4.0% to 4.5%/4.2% respectively [3]. - The GDP growth for Q4 this year is expected to be 4.0%, up from a previous estimate of 3.7%. The current U.S. tariffs on China are projected to remain at 30% for the next two years, reducing the urgency for new policy measures [3]. - It is anticipated that the government may introduce additional fiscal stimulus of 0.5 trillion to 1 trillion RMB to support infrastructure investments, alongside potential interest rate cuts of 15-20 basis points and a reserve requirement ratio reduction of 50 basis points [3]. Risks and Optimistic Scenarios - Key risk factors include tariffs and domestic policy directions. In an optimistic scenario, Morgan Stanley predicts the U.S. may further eliminate 20% of tariffs on fentanyl before the end of Q3 this year, coupled with more consumer stimulus and accelerated structural reforms in China [4]. Stock Market Outlook - Morgan Stanley's chief equity strategist for China, Wang Ying, has raised the stock index targets due to structural improvements such as a rebound in return on equity (ROE) and stabilization in earnings. However, macroeconomic pressures persist, maintaining a market-weight rating for Chinese stocks while recommending selective stock and sector investments for excess returns [5]. - The reasons for the upgraded rating include: (1) a rebound in net asset returns and upward adjustments in valuation, particularly for offshore stocks; (2) confirmed government support for the private sector; (3) emergence of leading tech companies in AI and smart manufacturing that can compete globally [5]. - The projected index targets for June 2026 are: MSCI China Index at 78 points (up 5%), Hang Seng Index at 24,500 points (up 5%), Hang Seng China Enterprises Index at 8,900 points (up 5%), and CSI 300 Index at 4,000 points (up 3%) [5]. Market Preferences and Sector Recommendations - Morgan Stanley favors offshore Chinese stocks, recommending an overweight position in Hong Kong stocks and American Depositary Receipts (ADRs) due to expectations of a stronger RMB and continued inflow of southbound capital into the Hong Kong market [6]. - Sector allocation suggestions include: (1) overweighting technology and internet leaders, particularly in AI and smart manufacturing; (2) adopting a high dividend strategy to hedge against volatility, while underweighting cyclical sectors like energy and real estate [6].