(CNBC) – Morgan Stanley has raised its prediction for China’s economy in 2023, saying that a recovery will happen sooner and faster than expected.
According to a research note led by the firm’s chief Asia economist, Chetan Ahya, the firm’s forecast for the country’s gross domestic product in 2023 was raised from 5% to 5.4%. Before, the forecast was at 5%.
“We had previously thought that business would pick up again by the end of 2Q23. “Now, we expect mobility to get better starting in early March,” the note said. It also said that the company expects a “faster and sharper rise in mobility” to show up in the economy starting in the second quarter.
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The firm raised its recommendation rating for Chinese stocks from “equal-weight” to “overweight” earlier this month, based on a return of optimism. This was the end of a position it had held for almost two years.
China’s government is also changing its focus to put more emphasis on economic growth. This is another reason why Morgan Stanley changed its outlook for the country’s economy.
The note said, “From our point of view, policymakers are working together to boost growth on all fronts.” “This is the first time since 2019 that domestic macro policies and COVID management are working together to help the economy grow instead of working against each other.”
Reuters also said that the country is working on a stimulus package worth more than $143 billion to help its semiconductor industry. This would be one of the biggest fiscal incentive packages the country has ever had.
Yuan is far too cheap.
Morgan Stanley also thinks that China’s exchange rates are too low.
“In FX, we don’t think the market is fully pricing in the reopening trade yet,” the note said. It also said that historically, forex traders have turned their U.S. dollar holdings into Chinese yuan when the local currency was stronger.
“Since CNY has recently gone up in value, they have more reason to convert, which makes CNY stronger, especially before 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 worth 6.9590 U.S. dollars. This is below the key 7.0 level against the greenback, which Morgan Stanley says makes it more appealing for exporters to use U.S. dollars to buy more Chinese yuan.
“This is because the weak economy will lead to fewer imports, which will help the CNY,” the note said.
“Amount of danger”
Morgan Stanley said that a possible risk is that policy support could be taken away.
Analysts think that the number of COVID infections will go up as China reopens. China’s leaders might have to change their policies if the number of hospitalizations goes up quickly and the public health care system is put under a lot of stress.
“An earlier-than-expected withdrawal of policy support, such as a sharp cutback in infrastructure spending, tightening of monetary policy, or tightening of regulatory policies, could dampen animal spirits and slow growth,” it said.
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The report said that if restrictions are loosened even more, there will probably be a big jump in the number of COVID cases. However, the company said that the effects of this jump would be short-lived.
Geopolitics is another area that makes it hard to predict growth for Morgan Stanley.
“The return of geopolitical tension much earlier than expected could also cause China’s equity risk premium to go up,” the note said.
