by Employees working on carbon fiber badminton racket production line at a factory in Sihong County, Jiangsu Province of China. 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, expecting a recovery in activity to come sooner and sharper than expected.
The firm 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 firm’s chief Asian economist Chetan Ahya.
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“We previously expected a rebound in activity to materialize from the end of 2Q23. We now expect mobility to improve from early March,” the statement said, adding that the company expects to see a “faster and more net of mobility” to be reflected in the economy starting in the second quarter.
The outlook update comes after the firm raised its recommend rating for Chinese equities to overweight from equal weight earlier this month on reopening optimism, marking the end of a position it held for nearly two years.
The Chinese government is also prioritizing economic growth, another pillar behind Morgan Stanley’s revised forecast for the country’s economic outlook.
“In our view, policy makers are taking concerted action to boost growth on all fronts,” the statement said. “This is the first time since 2019 that domestic macro policies and Covid management are aligned in supporting a growth recovery, rather than acting as an offsetting force.”
Reuters separately reported that the nation is working on a stimulus package worth more than $143 billion to bolster its semiconductor industry, which would be one of the largest tax stimulus packages ever.
Yuan undervalued
Morgan Stanley also sees China’s exchange rates as undervalued.
“In FX, we don’t believe the market is yet to fully consider reopening trading,” the statement said, adding that forex traders have historically converted their holding of US dollars into Chinese yuan while the onshore currency was stronger.
“Given the recent appreciation of the CNY, they now have more incentive to convert, pushing the CNY stronger, especially before the Chinese New Year when they have to pay wages and bonuses,” economists said in the note.
The onshore Chinese yuan It stood at 6.9590 against the US dollar on Wednesday morning, below the key 7.0 level against the greenback, which Morgan Stanley says makes it more attractive for exporters to buy more Chinese yuan with US dollars.
“This is because the economic weakness will be reflected in fewer imports, supporting the CNY,” the statement said.
“Number of Risks”
One of the risks recognized by Morgan Stanley is a potential withdrawal of political support.
As China reopens, analysts predict an increase in Covid infections. A rapid increase in hospitalizations and strains on the public health system could lead Chinese officials to rethink their policy stance.
“An anticipated withdrawal of policy support — such as a steep drop in infrastructure spending, monetary policy tightening or regulatory policy tightening — could dampen the spirit animal and weaken growth,” he said.
The report said further easing of restrictions is likely to lead to a significant increase in Covid cases, although the firm has expected the impact of the increase to be short-lived.
Another area of uncertainty for Morgan Stanley’s growth prospects is geopolitics.
“The much earlier re-emergence of geopolitical tension could also trigger a spike in China’s equity risk premium,” the note said.
