July 14, 2021: -Morgan Stanley urges the investors to be cautious on Chinese stocks, given the country’s recent regulatory crackdown on its internet companies.

The investment bank reiterated its call to downgrade Chinese stocks under the MSCI China index to equal weight, which means they are expected to perform similar to different stores in other emerging markets. That call was first made in January this year.

The MSCI China stocks include both A-shares listed on the mainland and offshore shares listed in Hong Kong.

Jonathan Garner, chief Asia and emerging market equity strategist at Morgan Stanley explained why the bank had repeated that call. “What we are seeing, I think, is that the anti-trust regulation is proving sort of much deeper and more long-lasting than we had thought,” he told CNBC on Tuesday.

Fears over regulatory scrutiny on Chinese tech companies are growing again after China announced a cybersecurity review of ride-hailing app Didi in early July.

Authorities ordered app stores to remove Didi’s app for download. Just days after the Chinese company launched its IPO in the U.S., Chinese regulators also alleged that Didi had illegally collected users’ data.

Since then, China has opened a cybersecurity review into three more Chinese companies listed in the U.S. Garner also pointed to China’s “new focus” on data security.

Beijing recently started a new battlefront in tackling the use and collection of data.

In June, a data security law defined the rules around how all companies collect, store, process, and transfer data. The law will take effect in September.

Last week, Authorities said that China plans to strengthen supervision of all Chinese firms listed offshore and tighten rules around how firms manage data security. On Saturday, China’s cyberspace regulator proposed that any company with data on more than 1 million users must go through a cybersecurity review before listing overseas.

“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.