Investors in China are being warned to stay defensive as the second half of 2025 begins. Analysts at Morgan Stanley, led by Laura Wang, said Thursday that local markets could face a wave of volatility in the coming weeks.
In her team’s report, Laura said, “We caution against a potential volatility surge in the next month or two.” They flagged a drop in confidence toward mainland A Shares, noting that officials in Beijing haven’t taken real action to support growth, and aren’t expected to do so at the Politburo meeting scheduled later this month.
The warning comes as the July 9 deadline for US trade deals closes in, and a separate 90-day tariff pause with China is on track to end in mid-August. Tensions around trade are once again putting pressure on local portfolios.
While mainland stocks made a small gain last week, the Hong Kong market, dominated by tech and global names, declined. That split shows investors are already starting to adjust their strategies based on how exposed companies are to external shocks. This cautious tone was first reported by Bloomberg.
Analysts push high-yield stocks and banks amid tech slowdown
Laura still sees some value in AI-related names, but she’s not betting the house on it. Instead, she advised investors to hold some exposure to dividend-paying stocks. One of her team’s top picks right now is PICC Property & Casualty, a Chinese insurer listed in Hong Kong.
That company offers a 4.5% dividend yield, and analyst Rick Zhao said in June that it could benefit from higher demand in auto insurance. Morgan Stanley even removed Pop Mart, the toy company behind Labubu, from its China-Hong Kong Focus List last month to make room for PICC.
This dividend theme isn’t unique to Morgan Stanley. Over at UBS Securities, Lei Meng, their China equity strategist, said in a note last Monday that his team is drilling into “fund flow structure and market style.”
He said medium and long-term investors are leaning toward high-dividend stocks and bank shares, and that the decision is being reinforced by state-backed buying of those sectors. Meng added that inflows into tech would likely cool off after six months of aggressive positioning in that space.
In the first half of the year, foreign and domestic interest in Chinese tech stocks rose sharply, mostly because of optimism around AI. But the bigger picture stayed grim, with China’s broader economy showing little real growth.
That split became obvious in the performance numbers. The Hang Seng Index, loaded with tech names like Tencent and Alibaba, jumped about 20% in the first six months of the year. Meanwhile, the Shanghai Composite, which is full of state-owned industrial and finance names, moved up by less than 3%.
Local investors eye Hong Kong for higher yields
The push for yield is also being driven by mainland Chinese investors who are sick of weak returns in the local market. A report in late June by J.P. Morgan’s Wendy Liu showed these investors are turning to Hong Kong-listed companies to get more income.
She named PetroChina, with a 7.3% yield, and CR Power, with a 6.1% yield, as preferred stocks for income. Both companies are seen as offering stable returns in a market where few others do.
This renewed interest in local dividend stocks also lines up with a broader problem. Chinese investors now face tighter limits on how much they can invest abroad. That’s made it harder to reach US markets or even other regions.
At the same time, global investors still think US stocks are the lowest-risk option, and only look at China, Europe, or emerging markets when they want to diversify their risk.
Liqian Ren, who heads quantitative investment at WisdomTree, said institutional investors outside of China don’t care about slow-growth dividend stocks.
“For investors outside China, the unglamorous stocks [such as utilities], it’s not going to be where they park their cash,” she said. Her team sees no real reason for international players to flood into these yield names when US assets still dominate in terms of safety and returns.
Ren also pointed to another issue that’s limiting global excitement about China’s AI run: many of the most promising AI companies aren’t even listed.
Firms like ByteDance are still private, meaning investors can’t touch them unless they’re already inside the game. That’s left outsiders with limited options to benefit from the AI wave in China, no matter how hot it looks on paper.
Cryptopolitan Academy: Coming Soon - A New Way to Earn Passive Income with DeFi in 2025. Learn More