Workers 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 faster pace as the Covid-19 lockdown halted industrial production and disrupted supply chains.
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Morgan Stanley raised its outlook for the Chinese economy in 2023, predicting a recovery in activity will come sooner and more clearly than expected.
The company raised its forecast for the country’s gross domestic product in 2023 to 5.4% from its previous outlook of 5%, according to a research note issued by Chetan chief Asia economist. Ahya takes the lead.
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“We previously expected the recovery to materialize from the end of Q2 FY23. We are now anticipating improved mobility from early March,” the note added. that the company expects to see “a faster and more pronounced increase in mobility” that will be reflected in the economy starting in the second quarter.
The prospective upgrade comes after the company raise its recommended rating sent Chinese stocks gaining weight from balance earlier this month on reopening optimism, marking the end of a stance they had held for nearly two years.
The Chinese government is also shifting to prioritize 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 spur growth on all fronts,” the note said. “This is the first time since 2019 that domestic macro policies and Covid management are linked to support the growth recovery, rather than act as antagonistic forces.”
Reuters separately reported that the country is working on a stimulus package worth more than $143 billion to support its semiconductor industry, which will be one of the largest financial incentives from before to now.
The yuan is undervalued
Morgan Stanley also considers China’s exchange rate undervalued.
“In terms of forex, we do not believe the market is fully pricing in a reopening of trading,” the note said, adding that forex traders had previously switched holdings. hold their US dollar to the Chinese yuan while the domestic currency is stronger.
“With the recent appreciation of the CNY, they now have more incentive to convert, pushing the CNY stronger, especially before the Lunar New Year when they need to pay salaries and bonuses,” the economists said. in the report.
The Chinese yuan on shore stood at 6.9590 against the US dollar on Wednesday morning – below the key 7.0 against the greenback, which Morgan Stanley said prompts exporters to buy more Chinese yuan in US dollars become more attractive.
“This is because the weakness in the economy will be reflected in fewer imports, supporting the CNY,” the note said.
‘The amount of risk’
One of the risks that Morgan Stanley acknowledges is the potential for policy support to be withdrawn.
During China’s reopening, analysts expect the number of Covid cases to increase. The rapidly increasing number of hospitalizations and the strain on the public health care system may cause officials in China to rethink their policy stance.
“An earlier-than-expected withdrawal of policy support – such as a sharp reduction in infrastructure spending, a tightening of monetary policy, or a tightening of regulatory policy – could dampen animal spirits and make impaired growth,” it said.
The report says further easing of restrictions will likely lead to a significant increase in the number of Covid cases, although the company predicts the impact of this increase will 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 cause a spike in China’s equity risk premium,” the note said.
