Morgan Stanley says investors should be cautious on Chinese stocks amid tech crackdown

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U.S. investment bank Morgan Stanley reiterated its call to downgrade Chinese stocks under the MSCI China index.

"So there's a high degree of uncertainty as to how this affects the investment landscape and the growth of internet space in China," Garner said.In a note last week, Morgan Stanley said it preferred Chinese A-shares listed in the mainland over those listed in Hong Kong, in light of that announcement last week for more regulatory oversight of Chinese companies listed overseas.

The regulatory announcement also said Beijing will be tightening restrictions on "illegal activities" in securities market, including insider trading and financial fraud. That would be good for A-shares as it signals that China wants to boost the quality of its domestic markets, Morgan Stanley pointed out.

"Not all companies are likely to be affected equally. We think Chinese companies in certain sensitive sectors, e.g., data-rich tech firms and those operating in areas where foreign ownership is restricted, will likely seek more onshore and/or HK listings instead of in the US," the investment bank said.However, Morgan Stanley said the "deeper background driving force" pushing companies to flock home to list will ultimately depend on how the relationship between U.S.

"Under such a scenario, the equity risk premium could rise across the board for Chinese equities and the investability of Chinese equities could diminish," it added.

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