Employees working on the production line of carbon fiber badminton rackets at a factory in Sihong County, in China’s Jiangsu Province. China reported on Saturday that factory activity in April slowed at a steeper pace as Covid-19 shutdowns halted industrial production and disrupted supply chains.
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Morgan Stanley raised its outlook for China̵[ads1]7;s economy in 2023, predicting a pick-up in activity will come earlier and be sharper than expected.
The firm raised its forecasts for the country’s gross domestic product in 2023 to 5.4% from a previous outlook of 5%, according to a research note led by the firm’s chief Asia economist Chetan Ahya.
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“We had previously expected a pick-up in activity to materialize from late 2Q23. We now forecast mobility to improve from early March,” the note said, adding that the firm expects to see a “faster and sharper increase in mobility” to be reflected in the economy starting in the second quarter.
The outlook upgrade comes after the firm raised its recommendation rating on Chinese stocks to overweight from equal weight earlier this month following reopening optimism, marking the end of a stance it held for nearly two years.
China’s government is also shifting to prioritize 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 lift growth across all fronts,” the note said. “This is the first time since 2019 that domestic macro policy and Covid management are aligned to support a growth recovery, rather than act as counter forces.”
Reuters reported separately that the nation is working on a stimulus package worth more than $143 billion to support its semiconductor industry, which would be one of its largest fiscal stimulus packages ever.
Morgan Stanley also sees China’s exchange rates as undervalued.
“In FX, we do not believe the market is fully pricing in the reopening trade yet,” the note said, adding that currency traders have historically converted their US dollar holdings into Chinese yuan while the onshore currency was stronger.
“Given the recent strengthening of the CNY, they now have more incentive to convert, pushing the CNY harder, especially before the Chinese New Year when they need to pay salaries and bonuses,” the economists said in the note.
The Chinese yuan on land stood at 6.9590 against the US dollar on Wednesday morning – below the key level of 7.0 against the dollar, which Morgan Stanley said makes it more attractive for exporters to buy more Chinese yuan with US dollars.
“This is because the economic weakness will be reflected in less imports, supporting the CNY,” the note said.
“Number of risks”
One of the risks that Morgan Stanley acknowledged is a potential withdrawal of policy support.
During China’s reopening process, analysts expect an increase in Covid infections. A rapid increase in hospitalizations and strain on the public health system could possibly cause officials in China to reconsider their policy stance.
“An earlier-than-expected withdrawal of policy support – such as a sharp pullback in infrastructure spending, tightening of monetary policy or a tightening of regulatory policy – could dampen spirits and dampen growth,” it said.
The report said further easing of restrictions was likely to lead to a significant increase in Covid cases, although the firm predicted the impact of the increase would be short-lived.
Another area of uncertainty for Morgan Stanley’s growth prospects is geopolitics.
“The geopolitical tension re-emerging much earlier could also trigger an increase in China’s equity risk premium,” the note said.