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Workers work on the production line of carbon fiber badminton rackets at a factory in Xihong County, Jiangsu Province, China. China reported on Saturday that factory activity slowed sharply in April as Covid-19 lockdowns halted industrial production and disrupted supply chains.

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Morgan Stanley has raised its outlook for China’s economy in 2023, predicting that the recovery in activity will come earlier and be better than expected.

The organization It raised the country’s GDP forecast to 5.4 percent by 2023, according to a research note led by the company’s chief Asia economist Chetan Ahya.

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“Previously, we expected a resurgence in activity from late 2Q23. We are now projecting an improvement in activity from early March,” the note added. In the economy since the second quarter.

The outlook upgrade comes after the company earlier this month raised its recommendation for China shares to equal weight on opening optimism, ending a two-year hold on the stock.

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The Chinese government is moving to prioritize economic growth, another pillar behind Morgan Stanley’s revised economic outlook for the country.

“From our perspective, policymakers are taking concerted action to boost growth on all fronts,” the memo said. This is the first time since 2019 that domestic macro policies and Covid management are supporting growth recovery rather than acting as countervailing forces.

Separately, Reuters reported that the country is rolling out a more than $143 billion stimulus package to support the semiconductor industry, its largest ever fiscal stimulus package.

Low price yuan

Morgan Stanley views China’s foreign exchange as undervalued.

“In FX, we don’t believe the market is pricing in a fully open trade yet,” the note said, adding that foreign traders have historically converted US dollars into Chinese yuan when foreign currencies have strengthened.

“Given the recent appreciation of the CNY, they now have more incentive to change, especially when they want to pay salaries and bonuses before the Chinese New Year, so they are pushing the CNY even further,” he said.

of Offshore Chinese Yuan It stood at 6.9590 against the US dollar on Wednesday morning – below the greenback’s key 7.0 level, which Morgan Stanley said would make it more attractive for exporters to buy more Chinese yuan in US dollars.

“This is because the economic weakness is reflected in less imports, favoring the CNY,” the note said.

“Number of Accidents”

One of the risks that Morgan Stanley believes is the withdrawal of policy support.

Analysts expect an increase in Covid infections as China reopens. The rapid increase in hospitals and the pressure on the public health care system may cause officials in China to rethink their policy stance.

China is coming through with a covid reopening, but it will be a tough ride.

“An abrupt withdrawal of policy support – such as a sharp pullback in infrastructure spending, tightening of monetary policy or tightening of regulatory policies – could dampen spirits and dampen growth,” he said.

The report said further easing of restrictions would lead to a significant increase in Vivid cases, although the company predicted the impact of the move would be short-lived.

Another area of ​​uncertainty for Morgan Stanley’s growth outlook is geopolitics.

“A resurgence of geopolitical tensions could push Chinese equities higher,” the note said.

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