Morgan Stanley released a research report stating that the MSCI China Index has risen this year, and beyond market sentiment and liquidity support, corporate fundamentals improvement is also reflected in the index's stable earnings and positive revision magnitude. The firm has identified industries most critical to the index's earnings growth to assess sustainability.
The firm noted that China's stock market (MSCI China Index) recorded the world's best performance over the past 12 months with a total return of 48%, and year-to-date it ranks second globally with a 38% return, trailing only South Korea (50%).
Morgan Stanley believes this rally is supported by structural improvements, including a bottoming out and recovery in return on equity (ROE), continued capital flows toward high-quality large-cap stocks, and increased government support for private enterprises and innovation. These developments have moved away from the previous macro-cycle dominated phase while significantly improving investor sentiment, providing strong support for earnings valuation re-rating.
The firm stated that earnings growth has become a key element of fundamental improvement in this rally, serving as the core driver of market performance for three consecutive years since 2023. Morgan Stanley decomposed the annual total returns of the MSCI China Index since 2010 into three components: dividends, earnings per share (EPS) growth, and valuation re-rating.
EPS growth has made positive contributions to the MSCI China Index's year-over-year total returns for three consecutive years since 2023: contributing 0.6 percentage points in 2023, 5.0 percentage points in 2024, and 3.2 percentage points so far in 2025. This marks the first time since 2010 that EPS growth has contributed positively for three consecutive years.
Further analysis of sequential returns shows a clear inflection point in the second half of 2024, since when earnings growth's positive contribution rate to the index's monthly returns increased to approximately 75%, significantly up from the previous 50%.
Looking ahead, Morgan Stanley is optimistic about the sustainability prospects of China's stock market earnings growth. Core sectors including internet, technology, healthcare, and automotive continue to see upward revisions to earnings forecasts, with valuations also at reasonable levels. While earnings forecast adjustments for the banking sector remain predominantly downward, their limited weighted contribution to overall index earnings growth means industry pressures are not expected to drag down the broader market trend.
The firm believes that this year's intense price competition in the domestic e-commerce industry is expected to end, which should drive accelerated earnings growth in the sector in 2026, while the brief slowdown in 2025 represents only a temporary adjustment.