Morgan Stanley raises its China growth forecast for 2023, expects stronger recovery earlier

Employees work on a carbon fiber badminton racket production line at a factory in Sihong County, Jiangsu Province, China. China reported on Saturday that factory activity in April contracted at a sharper pace as the Covid-19 lockdown halted industrial production and disrupted supply chains.

China Optical Group | Getty Images

Morgan Stanley raised its outlook for the Chinese economy in 2023, expecting a rebound in activity to occur earlier and be sharper than expected.

The company raised its forecast for the country’s gross domestic product in 2023 to 5.4% from its previous forecast of 5%, according to a research note led by the company’s chief Asian economist Chetan Ahiya.

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“We previously expected a pickup in activity from late Q2 ’23. Now we expect mobility to improve from early March,” the note said, adding that the company expects a “faster and sharper rise in mobility” to be reflected in the economy starting in the second quarter.

The outlook upgrade comes after the company raised its recommendation rating for Chinese stocks to overweight from equal weight earlier this month with reopening optimism, signaling the end of a stance it had followed for nearly two years.

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The Chinese government is also shifting to prioritizing economic growth, another pillar behind Morgan Stanley’s revised outlook for the country’s economic outlook.

“In our view, policymakers are taking concerted action to lift growth across all fronts,” the note said. “This is the first time since 2019 that domestic macro policies and Covid management have aligned themselves in supporting a growth recovery, rather than acting as compensating forces.”

Reuters separately reported that the nation is working on a stimulus package worth more than $143 billion to support the semiconductor industry, which would be one of the largest fiscal stimulus packages ever.

The yuan is undervalued

Morgan Stanley also finds that China’s foreign exchange rates are undervalued.

“In the FX market, we don’t believe the market is pricing in a full reopening of trade yet,” the note read, adding that forex traders have historically converted their holdings from US dollars into Chinese yuan while the local currency has been stronger.

“Given the recent rally in the Chinese yuan, they now have more incentive to turn around, which is pushing the CNY stronger, especially before the Chinese New Year when they need to pay wages and bonuses,” the economists said in the note.

The Wild Chinese Yuan It settled at 6.9590 against the US dollar on Wednesday morning – below the key 7.0 level against the dollar, which Morgan Stanley said makes buying more Chinese yuan in US dollars more attractive to exporters.

“This is because economic weakness will be reflected in lower imports and support for the Chinese yuan,” the note said.

number of risks

One risk that Morgan Stanley has acknowledged is the possible withdrawal of policy support.

During China’s reopening process, analysts expect an increase in Covid infections. The rapid increase in hospitalizations and pressure on the public healthcare system may cause officials in China to rethink their political stance.

China will come through reopening Covid, but it will be a bumpy ride

“Withdrawal of policy support earlier than expected – such as a sharp decline in infrastructure spending, tightening of monetary policy, or tightening of regulatory policies – could dampen animal spirit and dampen growth,” she said.

Further easing of restrictions is likely to lead to a significant rise in Covid cases, the report said, although the company expected the impact of the increase to be short-lived.

Another area of ​​uncertainty for Morgan Stanley’s growth outlook is geopolitics.

“The re-emergence of geopolitical tensions much earlier could also lead to a rise in the risk premium of Chinese equities,” the note said.

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