HONG KONG, May 12 (Reuters) - Hedge funds, especially

U.S.-based ones, added bullish bets on Chinese stocks last week

on hopes of progress in U.S.-China trade talks, according to

Morgan Stanley ( MS ).

MSCI China Index and China's blue-chip CSI

300 rose 2.4% and 1.9%, respectively, last week, ahead

of the high-stakes U.S.-China trade talks in the Swiss city of

Geneva over the weekend.

U.S.-based hedge funds "re-engaged" with China by absorbing

both Chinese shares traded in the U.S. and domestic A-shares,

after seeing encouraging signs surrounding the potential for a

trade deal, Morgan Stanley ( MS ) said in note published Friday.

In comparison, hedge funds reduced positions in most other

Asian regions, led by Thailand, Hong Kong, India and Australia,

the bank said.

Both U.S. and Chinese officials struck a positive note after

they ended the two-day Geneva trade talks, with markets awaiting

specific details of any early agreement later in the day.

Before the meeting, U.S. President Donald Trump signaled a

willingness to de-escalate the trade war and said an 80% tariff

on Chinese goods "seems right," suggesting for the first time a

specific reduction target since he imposed a 145% tariff on

Chinese imports.

Chinese shares dropped sharply the week following those

tariff announcements but have since recovered. Both CSI 300 and

Hong Kong's Hang Seng Index now nearly back to around the

April 2 level when Trump announced sweeping tariffs.

Hedge funds' exposure to China is still well below peak

levels, Morgan Stanley ( MS ) added.

For most investors, China remains a tactical trade for now.

Michael Dyer, an investment director for M&G Investments'

long-short multi-asset strategy, said his firm recently raised

exposure to China.

"We don't have a better crystal ball for what's going to

happen in China. But at a certain point, the risk-return gets so

appealing," he said, referring to global investors' extremely

low positions and the cheap valuation of Chinese equities.

(Reporting by Summer Zhen; Editing by Lincoln Feast.)