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Morgan Stanley Hikes Its China Growth Forecast For 2023, Anticipating A Stronger And Earlier Rebound

Morgan Stanley Hikes Its China Growth Forecast For 2023, Anticipating A Stronger And Earlier Rebound
Morgan Stanley lifted its forecast for China's economy in 2023, predicting that a recovery will occur sooner and more sharply than expected.
According to a research note led by the firm's chief Asia economist Chetan Ahya, the firm raised its forecast for the country's GDP in 2023 to 5.4% from 5% previously.
“We had previously expected a rebound in activity to materialize from late 2Q23. Now we are projecting mobility to improve from early March,” the note said, adding that the firm expects to see a “faster and sharper rise in mobility” to be reflected in the economy starting in the second quarter.
The outlook upgrade comes after the firm raised its recommendation rating for Chinese equities to overweight from equal-weight earlier this month, signaling the end of a nearly two-year-long stance.
Another pillar supporting Morgan Stanley's revised forecast for China's economic outlook is the Chinese government's shift toward prioritizing economic growth.
“From our perspective, policymakers are taking concerted action to lift growth across all fronts,” the note said. “This is the first time since 2019 where domestic macro policies and Covid management are aligned in supporting a growth recovery, rather than acting as countervailing forces.”
According to Reuters, the country is working on a stimulus package worth more than $143 billion to support its semiconductor industry, which would be the country's largest-ever fiscal incentive package.
Morgan Stanley believes that China's foreign exchange rates are also underpriced.
“In FX, we don’t believe that the market is pricing in the reopening trade fully yet,” the note said, adding that forex traders have historically converted their holding of the U.S. dollar into Chinese yuan while the onshore currency was stronger.
“Given the recent appreciation of CNY, they now have more incentive to convert, pushing CNY stronger, especially before the Chinese New Year when they need to pay wages and bonuses,” the economists said in the note.
On Wednesday morning, the onshore Chinese yuan was trading at 6.9590 per US dollar, well below the key 7.0 level, which Morgan Stanley said makes it more appealing for exporters to buy more Chinese yuan with US dollars.
“This is because the economic weakness will be reflected in fewer imports, supporting CNY,” the note said.
Morgan Stanley identified a potential withdrawal of policy support as one of the risks.
Analysts predict a spike in Covid infections during China's reopening process. A rapid increase in hospitalizations and strain on the public health care system may cause Chinese officials to reconsider their policy stance.

Christopher J. Mitchell

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