Driven by AI and energy investments, Morgan Stanley has raised its growth forecast for China.

Overview

Morgan Stanley has released its Asia-Pacific investor presentation, highlighting a revised upward revision to its growth forecast for China’s macroeconomy. This adjustment is primarily underpinned by two major structural drivers: the capital‑expenditure supercycle fueled by artificial intelligence (AI) and the energy transition. The report notes that, despite continued lags in domestic demand—particularly in consumption and real estate—the export sector, bolstered by these emerging trends, has emerged as a key anchor for cyclical growth. Meanwhile, the strategic stability of U.S.–China relations provides a clear roadmap for economic and trade cooperation over the next three years.

Core views

Export‑Driven Growth and the “Dual‑Speed Economy”: The report argues that China’s economy exhibits a “dual‑speed” pattern while remaining broadly stable. Exports have emerged as the primary driver of cyclical growth, underpinned by two structural factors: first, the global AI supercycle has boosted demand for Chinese electronic integrated circuits and related hardware; second, the energy transition has fueled exports of China’s “new three major industries”—electric vehicles, lithium batteries, and solar panels. Data show that China dominates key segments such as global rare‑earth refining (88%), magnet supply (90%), and electric‑vehicle battery production (86%), creating supply‑chain advantages that are difficult to replicate quickly. China–U.S. Relations and Strategic Stability: The leaders of China and the United States agreed to frame their bilateral relationship as one of “constructive strategic stability,” providing strategic guidance for the next three years. At the economic and trade levels, both sides achieved positive and balanced outcomes, including the establishment of a Trade and Investment Council, the resolution of market‑access issues for agricultural products, and progress toward reciprocal tariff reductions that support two‑way trade. Moreover, the planned autumn visit by Chinese leaders to the United States sends a constructive signal regarding the management of bilateral ties. The report underscores that the balanced distribution of critical resources—such as semiconductors and rare earths—forms the foundation of this strategic stability. Lagging Domestic Demand and Policy Steadfastness: By contrast, domestic demand remains subdued, with labor market slack serving as a key constraint. The real estate sector continues to adjust, and years of declining new construction starts have depleted the industry’s pipeline, leaving real estate investment in negative territory. On the policy front, the government appears to be pursuing a “cruise‑control” approach, with the broad fiscal deficit expected to hover around 11.7% of GDP this year and no plans for supplementary budgets in the second half. Meanwhile, the central bank is unlikely to rely on RMB appreciation to address economic imbalances; instead, the exchange rate will remain largely influenced by U.S. dollar movements. The Double‑Edged Sword of AI Proliferation: China’s AI development has entered Phase 2.0, shifting its focus from model innovation to physical AI applications and real‑world deployment. Surveys indicate that 51% of enterprises have already become enablers or adopters of AI. In the short term, AI’s impact on GDP is neutral, but over the longer term it is expected to be positive. However, the rapid spread of AI may exacerbate employment pressures in the near term: generative AI could entrench youth unemployment, agent‑based AI may undermine wage stability among middle‑income workers, and physical AI risks accelerating structural displacement in blue‑collar service sectors. The report recommends that policy efforts prioritize reskilling, the creation of high‑tech jobs, and enhanced social safety nets to strike a balance between technological advancement and labor‑market stability.

Analysis framework

Institutional analysts have adopted an analytical framework characterized by “structural drivers plus cyclical fluctuations.” First, they identify AI and the energy transition as long-term structural supercycles of capital expenditure, examining how these trends are reshaping China’s export mix and the competitiveness of its high-tech manufacturing sector. Second, by contrasting the “dual-speed” dynamics—strong exports versus sluggish domestic demand (in real estate and consumption)—they elucidate the stability of aggregate macroeconomic conditions. Finally, by factoring in geopolitical dynamics (Sino‑U.S. relations) and policy leeway (fiscal deficits and monetary policy), they assess how improvements in the external environment can provide a buffer for internal structural adjustments. This approach underscores the pivotal role of supply-side strengths—such as rare earths and the battery‑industry value chain—in addressing demand-side challenges.

Methodology notes

• Industry/ Sector Analysis FrameworkSupply-and-Demand Framework

  By analyzing the capital expenditure demand driven by global AI and the energy transition—denoted as “demand”—and China’s supply-side advantages in relevant hardware and green technologies—denoted as “supply”—we can derive the underlying logic behind export growth.

  The research report notes that global demand for AI computing power and green energy has surged, while China boasts a complete value chain and cost advantages in rare earths, batteries, and electronic equipment manufacturing. This alignment of supply and demand has fueled export growth that has exceeded expectations.

• Macroeconomic frameworkCredit/debt cycle

  By examining the decline in investment and the contraction of credit during the real estate deleveraging process, we assess the extent to which these factors are weighing on the broader economy.

  The report notes that the decline in new housing construction starts has depleted the pipeline of construction projects, while investment continues to contract—hallmarks of the downturn phase in a debt cycle—explaining why domestic demand is recovering only slowly.

• Event-Driven Trading and Behavioral FinanceEarnings Discrepancy / Expectations Management

  The shift in China-U.S. relations from heightened tension and confrontation to “constructive strategic stability” has altered market pricing of geopolitical risks.

  The research report underscores that the consensus reached at the leaders’ meeting between the two countries has surpassed earlier market concerns about an escalation of the trade war, and that this improved relationship management is helping to stabilize business confidence and cross-border investment expectations.

Key data

• Broad-based fiscal deficit ratio11.7%It is expected to remain unchanged this year, with no supplementary budget in the second half.
• China’s global share of rare earth refining production88%It demonstrates China’s dominant position in the critical raw-materials supply chain.
• AI Adoption Rate Among Chinese Enterprises51%More than half of the surveyed companies have become AI enablers or adopters.
• Global AI infrastructure capital expendituresOver US$1 trillionThe 2026 forecast represents a substantial increase from the approximately US$700 billion in 2025.

Impact & implications

For the Chinese market, this signals a shift in growth drivers. The traditional model anchored in real estate and infrastructure is giving way to a new paradigm propelled by high-tech manufacturing and green-energy exports. While overall growth forecasts have been revised upward, structural divergence is intensifying: companies with competitive advantages in AI computing power, data-center equipment, and the new‑energy value chain stand to benefit, whereas sectors reliant on conventional domestic demand and labor‑intensive services may face greater pressure to transform. For investors, the focus should pivot from broad macro aggregates to sector‑specific alpha, particularly toward Chinese capital‑goods firms that can integrate into the global AI and energy supply chains.

Risks

• The diffusion of AI technologies may give rise to short-term labor-market frictions, particularly youth unemployment and the displacement of middle-income jobs.
• The real estate market adjustment has yet to run its course, and subdued new construction starts may continue to weigh on investment and the wealth effect.
• If geopolitical tensions persist, they could reinforce supply-side biases and disrupt global trade flows.
• If domestic policies fail to effectively ease labor market pressures, they could constrain the sustainability of the consumption recovery.

What to watch

• The specific implementation details of the subsequent China–U.S. economic and trade consultations, particularly progress on tariff reciprocity and market access.
• The commercialization progress of AI applications in China and their specific contributions to corporate earnings and profit margins.
• Labor market data, particularly the youth unemployment rate and changes in the services sector PMI employment sub-index.
• Whether there will be any marginal shifts in fiscal policy remains uncertain, although the prevailing expectation is for continued policy stability.