Morgan Stanley Estimates How Low Chinese Stocks Could Go Before Bottoming Out

Chinese equities have endured a difficult 2026, with the CSI 300 losing 13.44% and the Hang Seng declining 11.87%. Morgan Stanley does not expect the sell-off to end just yet.

The investment bank has projected potential further declines and identified a trigger that might mark the trough.

Declining Earnings Keep Dragging Valuations Down

The CSI 300 entered bear territory last week. In a note published Sunday and covered by Bloomberg, Morgan Stanley projects offshore stocks could drop another 10% to 15%. That would push valuations to roughly 8 times forward earnings, their historical average.

For mainland shares, the bank anticipates a comparable reduction to about 10 to 11 times earnings. The CSI 300 currently trades at 11.6 times, while the Hang Seng is at 9.5 times.

Weaker corporate earnings add to the downward pressure. Bloomberg data indicates that 2026 profit forecasts for MSCI China constituents have fallen more than 4% since late March. Reported results have missed analysts' estimates by an average of 9%.

The squeeze comes from weak consumer spending and price wars, highlighted by CATL's disappointing profit report. Stanley Tang of Sumitomo Mitsui DS Asset Management prefers Japanese, Korean and Taiwanese companies for their stronger earnings.

State Purchases by Beijing Are Key to Timing the Rebound

Despite weak earnings, Beijing has kept stimulus measures limited, with growth on track. Authorities have deployed state-backed funds, often called the national team, to support the market.

Morgan Stanley's timeline hinges on those purchases. Historically, markets have reached a bottom one to two months after prominent national team buying activity, the bank said. That pattern held when officials also made public pledges to stabilise equities.

Central Huijin, the main state investor, had approximately $188 billion remaining last week, according to Bloomberg Intelligence estimates.

“This more proactive messaging and still ample dry powder, based on historical experience, suggests that stabilization of the A-share market could be more visible now, likely within another month or two, or so,” Morgan Stanley said.

The bank favours mainland shares partly because of that support.

Previous Rescue Efforts Offer Clues on the Timeline

In early 2024, Central Huijin promised additional ETF purchases after the CSI 300 fell to a five-year low. The index subsequently recovered from that level.

In 2015, the market only bottomed about a year after roughly 1.24 trillion yuan in state buying.

Bridgewater's China operation views third-quarter declines as mostly driven by liquidity rather than high valuations. Berenberg's Ulrich Urbahn remains wary, citing weak corporate profitability.

“It is too early to conclude that the worst is over,” Urbahn added.

Hong Kong faces the Federal Reserve's October 28 decision, given its sensitivity to bond yields. Third-quarter results continue to arrive, with MSCI China heading for its second-worst earnings miss in two years.