Morgan Stanley raises its 2023 growth outlook for China

Employees working on the production line of carbon fiber badminton rackets at a factory in Sihong County, China’s Jiangsu Province. China on Saturday reported that factory activities fell more sharply in April as Covid-19 lockdowns halted industrial production and disrupted supply chains.

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Morgan Stanley has raised its outlook for China’s economy in 2023, forecasting a rebound in activity to come sooner and more strongly than expected.

The company raised its forecasts 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 Asia chief economist Chetan Ahya.

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“We had previously expected a rebound in activity from the end of Q2 23. Now we forecast an improvement in mobility from the beginning of March,” the release reads, adding that the company expects a “faster and stronger increase in mobility” in the economy from the second quarter.

The outlook upgrade comes after the company raised its recommendation rating on Chinese equities to overweight from equal weight earlier this month after renewed optimism, marking the end of a stance it had held for almost two years.

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

“In our view, policymakers are taking concerted action to boost growth on all fronts,” the statement said. “This is the first time since 2019 that national macro policies and Covid management are geared towards supporting a growth recovery rather than acting as a drag.”

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

Undervalued yuan

Morgan Stanley also sees China’s exchange rates as undervalued.

“In FX, we do not believe the market is fully pricing in the reopening of trading yet,” the release said, adding that FX traders have historically swapped their holdings of the US dollar for Chinese yuan, while onshore currency was stronger.

“With the recent CNY appreciation, they now have more incentive to convert, which will make the CNY stronger, especially ahead of the Chinese New Year when they have to pay wages and bonuses,” the economists said in the statement.

That Chinese yuan on land stood at 6.9590 against the US dollar as of Wednesday morning – below the key level of 7.0 against the greenback, making it more attractive for exporters to buy more Chinese yuan with US dollars, according to Morgan Stanley.

“This is because economic weakness will be reflected in fewer imports, which will support the CNY,” the statement said.

“Number of Risks”

One of the risks Morgan Stanley has acknowledged is a possible withdrawal of political support.

During the reopening process in China, analysts expect Covid infections to rise. A rapid rise in hospital admissions and the strain on the public health system could potentially cause officials in China to reconsider their political stance.

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“An earlier-than-expected withdrawal of policy support — such as a sharp contraction in infrastructure spending, monetary tightening or tightening regulatory policies — could dampen sentiment and weaken growth,” it said.

According to the report, further easing of restrictions is likely to result in a significant increase in Covid cases, although the company predicted the impact of the surge would be short-lived.

Another area of ​​uncertainty surrounding Morgan Stanley’s growth prospects is geopolitics.

“The much earlier resurgence of geopolitical tensions could also trigger a rise in China’s equity risk premium,” the statement said.

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