Morgan Stanley Raises Growth Outlook for China in 2023, Expects Stronger, Faster Rebound

Morgan Stanley Raises Growth Outlook for China in 2023, Expects Stronger, Faster Rebound

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

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Morgan Stanley raised its outlook for the Chinese economy in 2023, predicting that a rebound in activity will come sooner and be stronger than expected.

The firm 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 led by the chief economist for East Asia. company, Chetan Ahya.

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“We previously expected a rebound in activity to materialize from late 2Q23. We now expect mobility to improve from early March,” the note said, adding that the company expects to see a “faster and sharper increase in mobility” reflected. in the economy from the second quarter.

The outlook update comes after the company raised its recommendation rating for Chinese stocks to overweight from equal weight earlier this month during the re-opening of optimism, marking the end of a a position she maintained for almost two years.

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

“From our perspective, policymakers are taking concerted action to boost growth on all fronts,” the note said. “This is the first time since 2019 that national macroeconomic policies and the management of Covid have been aligned to support a recovery in growth, rather than acting as countervailing forces.”

Reuters reported separately that the country was working on a stimulus package worth more than $143 billion to support its semiconductor industry, which would be one of its biggest tax incentive programs.

Undervalued Yuan

Morgan Stanley also considers China’s exchange rates to be undervalued.

“In the forex market, we do not believe the market is yet fully pricing in the reopening of trading,” the note said, adding that traders have historically converted their US dollar holdings into Chinese yuan when the local currency was down. stronger.

“Given the recent appreciation of the CNY, they now have more incentive to convert, which pushes the CNY stronger, especially ahead of the Chinese New Year when they have to pay salaries and bonuses,” the economists said. in the footnote.

The chinese yuan ashore stood at 6.9590 against the US dollar on Wednesday morning – below the key level of 7.0 against the greenback, which Morgan Stanley said makes it more attractive for exporters to buy more Chinese yuan with U.S. dollars.

“This is because economic weakness will translate into lower imports, supporting the CNY,” the note said.

“Number of risks”

One of the risks recognized by Morgan Stanley is a potential withdrawal of political support.

As China reopens, analysts expect Covid infections to rise. A rapid increase in hospitalizations and pressure on the public healthcare system could eventually cause Chinese authorities to rethink their policy stance.

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

The report says further easing of restrictions is likely to lead to a significant increase in Covid cases, although the company has predicted the impact of the surge will be short-lived.

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

“Reemergence of geopolitical tensions much sooner could also trigger a spike in the risk premium for Chinese equities,” the note said.

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