Morgan Stanley's Xing Ziqiang latest viewpoint: This round of market is a re-recognition of China's sci-tech innovation industry chain advantages

Since successfully predicting the policy turning point in early September last year, the research views of Morgan Stanley's China economic team have increasingly attracted external attention.

The team's chief economist, Xing Ziqiang, has also been particularly valued by the outside world due to his sensitivity to policy and his systematic understanding of the macroeconomic and financial market.

As breakthroughs in China's manufacturing and AI large model technology become increasingly evident by 2025, the capital market is beginning to show its potential. At this juncture, what changes have occurred in Morgan Stanley's China economic team's views?

How will the market in 2025 differ from the past? What is the sustainability like?

How should we interpret the recent monetary policy and interest rate trends?

What macro indicators should we focus on in the second half of this year and next year?

Recently, Xing Ziqiang responded to these topics during a dialogue with Wall Street Insights.

This Round of Market is Different from "9.24"

Xing Ziqiang believes that this round of market in 2023 is significantly different from the "9.24" in 2024.

At the end of September last year, market confidence was maintained due to expectations of policy, and once subsequent policies (rhythm) were not as strong as expected, the market would quickly lose its backbone amid fluctuations.

In this round of market, what everyone values more is the re-recognition of China's scientific and technological innovation and the strength of the industrial chain, as well as the re-recognition of the resilience of private enterprises.

This means that the current market may hold a more calm attitude towards the policies of the Two Sessions, no longer completely relying on policy expectations to maintain confidence.

Confidence in the Sci-Tech Sector is Significantly Rebounding

Morgan Stanley releases the "China Economic Thermometer" series report every two weeks. This report includes many high-frequency indicators contributed by various industry groups.

From the titles of the reports, it can be seen that there are some obvious changes in wording from the end of September last year to the latest published report. The latest report reflects that entrepreneurs' enthusiasm for sci-tech related industries such as software, hardware, AI applications, and robotics has significantly increased. One typical example is Alibaba's recently announced capital expenditure plan, which is very strong. Additionally, many companies in the Greater Bay Area are currently showing significant improvement in expansion and entrepreneurial enthusiasm compared to last August and September.

However, Xing Ziqiang also pointed out that the areas where corporate confidence is currently rising are mainly in the sci-tech sector, directly driven by the "Six Little Dragons," AI, and other fields, such as software, hardware, AI applications, and robotics. In traditional industries and the consumer sector, challenges remain significant. This has prompted Morgan Stanley's latest "Economic Thermometer" report to title it "Confidence is Here, but Still Very Narrow." Xing Ziqiang believes that while the positive significance of the "Little Dragons" taking off is good, merely having the "Little Dragons" take off is not enough to lead China to achieve re-inflation.

Re-recognizing China's Industrial Chain Advantages

Xing Ziqiang also stated that the recent emergence of the "Six Little Dragons" in Hangzhou (Deep Exploration, Yushu Technology, Cloud Deep Technology, Strong Brain Technology, Qunhe Technology, Game Science) is not surprising.

Because, based on China's various advantages in the industrial chain, Chinese technology companies still have latecomer advantages in the next stage of the technological revolution. This is also a viewpoint he has reiterated multiple times over the past six monthsThe narrative style both domestically and internationally has changed over the past two years, leading to some concerns.

However, now everyone has re-recognized the advantages of China's industrial chain and its technological innovation capabilities. Especially in the phase of AI application implementation, Chinese companies have demonstrated a latecomer advantage. This once again proves that our industrial chain scale advantages in humanoid robots, intelligent driving, and green transformation are irreplaceable.

Xing Ziqiang believes that once global investors re-recognize this advantage of China, it may trigger a recovery in market confidence and a reassessment of Chinese stocks.

There is a process of mutual feedback and adjustment

Regarding expectations for the economy this year and next, Xing Ziqiang anticipates that 2025 may continue to be a year of exploration. During this year, subsidies aimed at consumption and supportive policies for other industries are expected, but the intensity of these measures in the initial stages may be relatively mild.

As continuous attempts and evaluations progress, these measures may gradually strengthen, and with changes in social livelihood feedback, decision-makers may gradually break away from conventional thinking, thereby further increasing policy intensity. This is a process of mutual feedback and adjustment. He also anticipates that in the second half of 2025, there may still be some pressure on economic growth rates both sequentially and year-on-year.

Therefore, in the second half of this year and even next year, decision-makers may adopt more forceful measures. His advocated trilogy—restructuring debt, stimulating consumption, and restoring corporate confidence—may receive more attention.

Policy support for consumption is crucial

Regarding consumption, Xing Ziqiang believes that since this year's Spring Festival, consumption data has been relatively stable. Highlights include subsidized electronic products like mobile phones and a booming film market due to blockbuster projects. However, there are still some consumption areas that are not performing well.

Overall, consumption still requires policy support or a boost from the overall economic recovery.

Regarding the next phase of policies, he anticipates that in 2025, there may be an increase in last year's old-for-new subsidy policies. Important meetings have already clarified that the product categories will be expanded.

Interest rate trends will ultimately align with the economy

Xing Ziqiang has noticed that there is indeed a common confusion and hesitation in the market regarding global monetary policy and interest rate trends.

In the United States, the new government’s policies of imposing tariffs externally and expelling immigrants internally have raised concerns about inflation, and the market is still debating how the Federal Reserve will balance the two major goals of inflation and employment.

The "impossible triangle" faced by the United States includes external tax increases, internal tax cuts, and immigrant expulsion policies, which may lead to rising inflation but could also bring downward pressure on the economy, not necessarily benefiting the U.S. market and consumer confidence. In such a game, the U.S. may need to seek a middle-ground solution under the pressure of the situation.

However, he believes that the situation is stronger than individuals, and China and the United States may ultimately achieve a long-term trend where interest rate movements align with economic fundamentals based on actual circumstances.

He further believes that although market expectations for U.S. interest rate cuts this year have been somewhat revised down, suggesting that the Federal Reserve may not cut rates as frequently as previously expected, Morgan Stanley has adjusted its expectation to one rate cut. However, if the U.S. economy does experience a downturn in the future, there may still be room for interest rates to decline next year and the year after

Further Breaking the Constraints of Thinking

Xing Ziqiang also pointed out that the policy shift in mainland China since September has demonstrated the preliminary exploration by relevant parties to elevate the inflation level.

However, the decision-makers still need time to break through three major cognitive biases, namely, that fiscal policy should be based on actual income, that policy efforts should lean towards the supply side, and the ongoing constraints of moral hazard.

Additionally, it is also necessary to stabilize entrepreneurs' confidence through further reforms, as well as to provide social security benefits for migrant workers and farmers to alleviate their concerns and promote consumption.

The AI Revolution Has Entered Its Second Stage

Xing Ziqiang also revealed that Morgan Stanley's AI research team and the head of Asian technology have pointed out that the AI revolution has entered its second stage, characterized by a rapid decline in cost curves, allowing low-cost access to ordinary households.

He believes that the current stage of AI competition is similar to the space race between the US and the Soviet Union in the 1960s and 70s, where landing on the moon was the ultimate goal. However, in the pursuit of this goal, many extended innovations emerged, such as vacuum cleaners and Sealy mattresses, which, although not directly used for moon landing, greatly boosted the economy and productivity.

Similarly, the emergence of DeepSeek has completely changed the global AI landscape—where only a few companies would invest billions or even hundreds of billions of dollars, along with immense computing power, to pursue the paradigm of Artificial General Intelligence (AGI) has been overturned.

As the thresholds and costs of AI technology in ordinary business applications have significantly decreased, it is expected to achieve rapid commercialization and be widely applied to enhance productivity across various industries.

Thus, he refers to this low-cost AI technology as "good enough" AI. Although it is not the ultimate holy grail, namely AGI (Artificial General Intelligence), it can already be applied in various scenarios. For instance, social software and large tech companies can easily integrate these technologies to develop a variety of rich software applications aimed at consumers, the healthcare industry, and other businesses.

The Narrative of the Industry Has Changed

The popularization and application of this relatively low-cost AI technology have changed the narrative surrounding AI. In the past, some might have thought that Chinese companies would be left behind by the wave of AI. However, it now appears that Chinese companies are particularly adept at applying "good enough" technology to practical implementation. The large-scale application from 1 to 100 has always been a strong suit of Chinese companies. This represents a significant trend change.

Just as in the mobile internet era, China has demonstrated strong capabilities in the application of mobile internet, whether it be 4G, 5G, or super apps.

With the change in narrative, people are beginning to believe that the entire industrial chain in China will benefit from this.

Initially, this view may have been merely a possibility, but over time, this narrative may gradually be validated. For example, many companies are using cloud services to deploy servers for the practical application of AI. Alibaba announced that it will invest 380 billion over the next three years, a scale that exceeds the capital expenditures of the past decade, precisely because AI has entered the implementation stage in China, leading to strong demand for cloud services, data centers, and local deploymentsThis discovery has made the market realize that China has also successfully boarded the fast train of AI development, and Chinese companies will have a latecomer advantage in the application sector. This is the biggest factor affecting market sentiment.

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