HONG KONG, May 29 (Reuters) - U.S.-domiciled long-only funds have unwound more than $6 billion in U.S.-listed China stocks this year, Morgan Stanley research shows, as China's fading recovery outlook and widening geopolitical tensions send investors opting for safer choices.

The Nasdaq Golden Dragon China Index of New York-listed mainland companies, consisting mainly of internet giants such as Alibaba Group, Baidu.com and JD.com, lost 5.6% this month, in sharp contrast to a 7.9% jump in the broader Nasdaq.

The China index, a gauge of Chinese American depositary receipts (ADRs), had fallen 10% in April and has lost about half of its gains from a remarkable rally that began last October, as China eased its harsh COVID 19-related restrictions and hopes ran high for a rapid economic recovery.

Mutual funds and ETFs domiciled in the United States have been among the major sellers, offloading $640 million of Chinese ADRs this month as of May 26, extending the total net selling in 2023 to $6.11 billion, according to a Morgan Stanley research report.

"It is a matter of economic growth and geopolitics. Investors are adjusting their expectations on China's cyclical rebound," said Gary Ng, senior economist at Natixis Corporate and Investment Bank.

"The ongoing U.S.-China tensions may also spook investors, and the news flow has been negative with tighter restrictions from both sides."

Recent economic data has pointed to a faltering recovery in China, including industrial profit figures over the weekend that showed a slump in the first four months of the year.

Concerns have also risen over escalating Sino-U.S. disputes relating to technology and trade. Last week Beijing posted a ban on the sale of some chips by U.S.-based Micron Technology Inc, while a U.S. lawmaker urged trade curbs on Chinese memory chip maker Changxin Memory Technologies.

"The market is diversifying to other options with a better story and lower policy risks in the short run, such as Japan," Ng said.

The total market value of U.S.-listed Chinese stocks has shrunk $102 billion since the end of March, according to calculations from Refinitiv data.

Some long-term money and large institutions in the United States are still in the process of lowering exposure to China, Kevin Liu, managing director and strategist at CICC Research, said in a note last week.

U.S. investors would rather buy "China proxies", such as French luxury brands or other emerging market stocks benefiting from China's reopening, than directly trade China equities, he said.

U.S. Hedge funds with a mixture of long and short positions kept their exposure to China ADRs largely unchanged in May, but short interest is rising, Morgan Stanley said. (Reporting by Summer Zhen; Additional reporting by Gaurav Dogra in Bengaluru; Editing by Edmund Klamann)