Morgan Stanley raises growth expectations: AI and energy capital expenditures enter a super-cycle

Overview

This is a macro and thematic research presentation from Morgan Stanley Asia, centered on raising growth expectations to reflect the AI and energy capex super-cycle. The report covers China-US relations, exports, domestic demand, real estate, fiscal policy, the renminbi, AI diffusion, rare earth and lithium battery supply-chain advantages, and the impact of AI on China's economy and labor market.

Core views

The report's core view is that China's medium- to long-term growth support is shifting from traditional real estate and loose policy toward AI diffusion, data center construction, energy and grid investment, and rare earth and lithium battery supply-chain advantages. Temporary stabilization in China-US relations helps reduce tail risks, exports still support cyclical growth, but domestic demand and real estate remain weak. The productivity gains and capex brought by AI will make a positive contribution to long-term GDP, though in the short term they may be offset by employment disruptions, still-developing commercialization, and bottlenecks in advanced chips and EDA.

Analysis framework

The report combines macro scenario analysis, industrial-chain share comparison, policy stance judgment, and an AI diffusion framework: it first assesses the impact of China-US relations and trade cooperation on external demand, then analyzes China's advantages in strategic industrial chains such as rare earths and lithium batteries, then evaluates macro constraints from the perspectives of GDP, inflation, fiscal policy, real estate, and the renminbi, and finally discusses AI transmission from infrastructure buildout to enterprise adoption, embodied intelligence, and the labor market.

Methodology notes

• macro scenario analysisgrowth expectation upgrade framework

  Treat AI and energy capex as new growth drivers

  The report does not simply raise growth expectations based on the traditional domestic-demand or real-estate cycle, but instead incorporates AI cloud, data centers, grid flexibility, energy storage, and manufacturing automation into the medium- to long-term growth outlook.

• industrial chain comparisonglobal market share and replicability analysis

  Measure China's supply-chain barriers through shares in rare earths, magnetic materials, power batteries, and energy storage batteries

  The report emphasizes that China has a complete value chain, rapid technological iteration, and scale-cost advantages in rare earth refining, magnetic materials supply, and lithium battery production and sales, while overseas replication will take time.

• technology diffusion analysisAI 2.0 diffusion framework

  Observe AI impact through open-source platforms, cost efficiency, system integration, and commercialization scale

  The report believes the center of AI is shifting, with bottlenecks gradually moving from model capability to deployment speed, cost efficiency, system integration, enterprise adoption, and labor reallocation.

• policy constraint analysissupply-centered policy preference

  Policy is more oriented toward industrial upgrading and supply capacity than toward aggressive demand stimulus

  The report notes that the Five-Year Plan still leans toward the supply side, the fiscal deficit rate is expected to remain flat, and the central bank is unlikely to rely on renminbi appreciation to solve economic imbalances.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China macro assets

  Affected by the AI and energy capex super-cycle

  Strengths

  AI diffusion, export resilience, strategic industrial-chain advantages, and temporary stabilization in China-US relations may improve medium- to long-term growth expectations.

  Weaknesses

  Domestic demand still lags, the property adjustment has not ended, and labor market slack remains a key constraint.

  Comparison

  Compared with prior cycles that depended on property and policy stimulus, this round of growth support is more tilted toward technology diffusion and supply-side capex.

  Risks

  Employment disruptions, insufficient policy力度, external demand fluctuations, and renewed geopolitical tensions.

• Rare earth and magnetic materials chain

  A core asset of China's supply-chain advantage and strategic stability

  Strengths

  China's global shares in rare earth refining output and magnetic materials supply reach 88% and 90%, respectively, creating technical, environmental, and scale barriers.

  Weaknesses

  Upstream reserves are not an absolute monopoly, and policy and trade frictions may affect exports and pricing.

  Comparison

  The report believes rare earth refining and magnetic materials supply are harder to replicate than resource reserves alone.

  Risks

  Overseas supply-chain reconstruction, changes in export controls, price volatility, and geopolitical frictions.

• Lithium batteries and energy storage

  A key beneficiary of energy capex and grid flexibility

  Strengths

  China's global shares in power batteries and energy storage batteries reach 86% and 92%, respectively, with a complete value chain, rapid technological iteration, and cost advantages.

  Weaknesses

  The industry may face price competition, capacity expansion, and margin pressure.

  Comparison

  Compared with rare earths, the advantage in lithium batteries comes more from a complete value chain, scale, and technological iteration.

  Risks

  Overseas localization policies, trade barriers, raw material price volatility, and slowing demand.

• AI, data centers, and industrial automation

  The main new variable behind the report's higher growth expectations

  Strengths

  AI cloud and data center construction, open-source platforms, cost efficiency, system integration, embodied intelligence, and manufacturing data are all expected to expand AI commercialization scenarios.

  Weaknesses

  Advanced chips, EDA, 2B monetization, and organizational process transformation are still developing.

  Comparison

  The report believes AI's impact is shifting from single-model capability toward deployment speed, cost efficiency, and system integration.

  Risks

  Labor substitution shocks, insufficient return on capex, technology restrictions, and commercialization falling short of expectations.

• Renminbi and China interest-rate expectations

  Constrained by dollar trends, policy preference, and economic imbalances

  Strengths

  The report mentions that the CFETS renminbi may rise modestly, while USDCNY depends more on the dollar trend.

  Weaknesses

  The central bank is unlikely to rely on renminbi appreciation to solve economic imbalances, and the exchange rate has limited help for domestic-demand recovery.

  Comparison

  Compared with a strong-exchange-rate policy, the report places more emphasis on maintaining prudence in fiscal and supply-side policy.

  Risks

  A stronger dollar, renewed China-US tensions, capital flows, and weaker-than-expected domestic growth.

• Real estate and domestic-demand-related assets

  Still a drag on macro growth and a variable to verify

  Strengths

  A partial recovery in housing sales year to date provides localized support.

  Weaknesses

  The recovery is narrow, years of declining new starts have shrunk the construction pipeline, and domestic demand still lags.

  Comparison

  Compared with the AI and energy capex chains, real estate is not a major upside driver in the report.

  Risks

  An unsustainable sales recovery, continued declines in construction and investment, and weakening employment and income expectations.

Key data

• Report date2026-05-18The front page of the report shows May 18, 2026 01:11AM GMT.
• Broad fiscal deficitapproximately 11.7% of GDPThe report expects this year's broad fiscal deficit ratio to remain broadly unchanged, with no supplementary budget in the second half of the year.
• Enterprise AI participation51%Among surveyed companies, 51% are already classified as AI enablers or adopters.
• China's share of global rare earth reserves49%The chart shows China's global market share in the rare earth reserve segment.
• China's share of global rare earth mine production69%The chart shows China's global market share in the rare earth mine production segment.
• China's share of global rare earth refining output88%The report views rare earth refining as a segment with strong technical and environmental constraints and a high degree of difficulty to replicate.
• China's share of global magnetic materials supply90%The chart shows that China has a high share in magnetic materials supply.
• China's share of global power batteries86%The chart shows China holds a high global share in EV Batteries.
• China's share of global energy storage batteries92%The chart shows China holds a high global share in ESS Batteries.
• AI impact on China's GDPneutral in the short term, positive in the long termThe report explicitly describes AI's impact on China's GDP growth as near-term neutral, long-term positive.

Impact & implications

For asset allocation, the report implies that China's macro growth narrative may shift from real estate and consumer recovery toward capex chains such as AI, energy, grids, storage, rare earths, and lithium batteries. Beneficiaries include data centers, power equipment, energy storage, industrial automation, embodied intelligence, autonomous driving, rare earth refining, and magnetic materials supply; however, if employment disruptions, property destocking, or external technology restrictions intensify, the pace of growth upgrade realization could slow.

Risks

• Short-term employment disruptions from AI diffusion may offset productivity gains.
• The real estate adjustment continues to weigh on domestic demand and household confidence.
• Fiscal policy remains on cruise control; without a supplementary budget, demand-side support may be limited.
• Although China-US relations are described in terms of strategic stability, chips, rare earths, tariffs, and market access may still fluctuate.
• Advanced chips, EDA, and 2B commercialization remain bottlenecks in China's AI ecosystem.
• The renminbi and external demand are highly affected by the dollar trend and the global trade cycle.

What to watch

• Whether the constructive strategic stability relationship between China and the United States turns into concrete progress in trade, investment, and technology cooperation.
• Whether enterprise AI adoption rates continue to rise, and whether AI truly enters earnings statements and productivity data.
• Orders and investment realization in data centers, grid flexibility, energy storage, and energy capex.
• Export policy, pricing, and overseas replication progress in the rare earth and lithium battery supply chains.
• Whether the housing sales recovery spreads from a few cities to a wider range.
• Whether the broad fiscal deficit rate remains around 11.7% and whether a supplementary budget appears in the second half of the year.
• Changes in labor market slack, employment stabilization policies, and AI substitution risks.
• The linkage among the CFETS renminbi, USDCNY, and the dollar index.