Summary of Morgan Stanley Global Macro Forum - China Watch Industry Overview - **Focus**: The report centers on the Chinese economy and its implications for various markets, particularly in the context of potential stimulus measures and macroeconomic trends. Key Points Economic Outlook - **Real GDP Growth**: Projected to slow to **4.5%** year-on-year in the second half of 2025, with persistent deflationary pressures [6][64] - **Policy Adjustments**: Anticipation of modest stimulus measures ranging from **RMB 0.5 trillion to 1 trillion** in early Q4 2025, aimed at infrastructure and consumption [64] Policy and Structural Reforms - **Fourth Plenary Session**: Expected discussions on the 15th Five-Year Plan (FYP) will provide insights into structural reforms, focusing on social welfare reform as a key policy lever [8][9] Equity Market Insights - **MSCI China Performance**: Strong returns in 2024 and year-to-date 2025 attributed to earnings growth and P/E re-rating, with MSCI China trading at discounts compared to other major global equity markets [12][15] - **Earnings Consistency**: Offshore market has shown in-line quarterly earnings results for three consecutive quarters [15] Currency and Credit Market Dynamics - **RMB Appreciation**: Mild appreciation of the RMB against the USD expected through 2026, influenced by foreign investor behavior and local market dynamics [26][64] - **China USD Credit Market**: Tight credit spreads supported by strong demand and negative net supply since 2022, with expectations for increased Dim Sum bond supply driven by foreign issuers [41][44] Commodities Market - **Metals Demand**: Strong year-to-date demand and exports for metals, with precious metals leading the performance, although some indicators show signs of slowing [49][54][64] - **Anti-Involution Policy Impact**: The policy has provided support for raw materials and processing fees, contributing to the overall demand in the commodities sector [54][64] Broader Market Implications - **Asia Rates and FX**: Limited spillover effects from China to the broader Asia region, with local dynamics and UST movements being more significant for local yields [34][64] - **Investor Sentiment**: Improved sentiment towards quality large-cap stocks and private firms, indicating a potential shift in investment strategies [64] Additional Insights - **Gradual RMB Appreciation**: Signals indicate a stable FX conversion for exporters, with no significant further rally expected in the absence of external pressures [29][64] - **Demand Indicators**: Some demand indicators for commodities are showing signs of overstretching, suggesting a need for cautious positioning [59][64] This summary encapsulates the critical insights from the Morgan Stanley Global Macro Forum regarding the Chinese economy, its equity markets, currency dynamics, and commodities, providing a comprehensive overview for investors and stakeholders.

Investment Rating - The report maintains a GDP growth forecast for China at 4.5% for 2025, indicating a stable outlook despite lingering deflationary pressures [2][12]. Core Insights - The report highlights that while tariffs have de-escalated, challenges remain, particularly with persistent deflation expected to last for 15 quarters from Q2 2023 to Q4 2026 [4][5]. - A supplementary fiscal package of RMB 0.5-1 trillion is anticipated in Q4 2025 to support infrastructure and key sectors, reflecting a shift towards a consumption-centric stimulus approach [12][10]. - The report outlines three scenarios: a base case with lingering deflation, an upside scenario with continued tariff de-escalation, and a downside scenario with tariff re-escalation [12]. Economic Growth Projections - Real GDP growth is projected at 4.5% for 2025, with a slight decline to 4.2% in 2026 under the base case scenario [12]. - The GDP deflator is expected to remain negative, indicating ongoing deflationary pressures, with estimates of -0.9% for 2025 and -0.7% for 2026 [12]. Tariff Analysis - The report assumes that US average tariffs on China will remain around 40%, with potential escalations still possible [13][14]. - China's export growth is expected to remain robust in Q2 2025 before declining in the second half of the year [15]. Domestic Stimulus and Policy Response - The focus of domestic stimulus will be on front-loading the announced RMB 2 trillion stimulus in the first three quarters of 2025, with a supplementary budget expected to be delayed until Q4 2025 [7][9]. - The report emphasizes the need for a shift from supply-centric policies to more consumption-driven strategies to address economic imbalances [70]. Consumption and Social Welfare - Consumption improvement has been policy-driven, but underlying momentum remains weak due to a sluggish job market [44]. - The report discusses the fragmented and unbalanced social welfare system in China, highlighting the need for reforms to enhance social safety nets [89][90]. Investment Trends - Investment growth is still too high relative to demand, with a need for structural reforms to address overcapacity issues [67][68]. - The report indicates that corporate pricing power remains subdued, with improvements in industrial profit driven by volume and cost reductions rather than pricing power [56]. RMB Outlook - The report forecasts mild appreciation of the RMB against the USD, with expectations of USDCNY reaching 7.15 by the end of 2025 [102][106]. - It also discusses the PBoC's plans for RMB internationalization and the establishment of a digital yuan international operations center in Shanghai [107][119].