Morgan Stanley revises China’s growth estimates from 5% to 5.4%

As a sign confidence in the Chinese policies, Morgan Stanley upgraded its growth forecast for China’s economy in 2023 from 5 percent to 5.4 percent.

But at the same time, it cited two risks – potential withdrawal of policy support and reappearance of geopolitical tension.

In this connection, Morgan Stanley predicted a rebound in activity earlier and sharper than expected. “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.

They also added that the firm expected to see a “faster and sharper rise in mobility” to be reflected in the economy starting in the second quarter.

China’s government is also shifting to 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 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.”

Separately, it was reported that China was working on a stimulus package worth more than $143 billion to support the country’s semiconductor industry, which would be one of its biggest-ever fiscal incentive package.

Morgan Stanley also sees China’s foreign exchange rates as underpriced. “In FX, we don’t believe that the market is pricing in the reopening trade fully yet,” the note said. The forex traders have historically converted their holding of the U.S. dollar into Chinese yuan while the onshore currency was stronger, it added.

“Given the recent appreciation of CNY [Chinese yuan], 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.

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

However, one of the risks that Morgan Stanley acknowledged is a potential withdrawal of policy support.

During China’s reopening process, analysts expect a surge in Covid infections. A rapid increase in hospitalizations and strain on the public health care system could possibly lead to officials in China rethinking 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 policies – could dampen animal spirits and weaken growth,” it said.

The report said further easing of restrictions will likely lead to a significant rise in Covid cases, though the firm predicted the impact of the surge will be short-lived.

Another area of uncertainty for Morgan Stanley’s growth outlook is geopolitics. “The reappearance of geopolitical tension much earlier could also trigger a spike in China’s equity risk premium,” the note said.


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