Chinese data does not change the pessimistic outlook for the economy and the yuan

Despite an upbeat batch of economic data out of China last week, including retail sales and industrial production estimates, economists maintain their pessimism.

UBS has lowered its annual growth forecast from 3% to 2.7% for 2022 and from 5.4% to 4.6% for 2023.

“While some of the current policy support will bear more fruit in the fourth quarter, the Covid situation is likely to remain difficult through the winter and into early 2023, and export growth is expected to slow,” the statement said. UBS’s chief China economist, Tao Wang, in the note.

Wang adds that the revised forecast for 2023 is still based on a scenario where the real estate market soon stabilizes and Covid restrictions ease from March.

But those restrictions have weighed on investor sentiment and it’s unlikely to rebound anytime soon, Mattie Bekink, China director of the Economist Intelligence Corporate Network, told CNBC’s “Squawk Box Asia.”

“We don’t see the political levers needed to facilitate a change,” she said of the national zero-Covid policy. “Essentially, zero-Covid has trampled human investor confidence in China.”

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Commenting on the sporadic regional shutdowns across China, she said, “It’s kind of a stranglehold for the Chinese economy right now.”

lower yuan

Economists also expect the Chinese currency to continue to weaken even after the the onshore and offshore yuan fell to its lowest level since July 2020 last week.

“We expect CNY weakness to persist in the near term, supported in part by overall USD strength,” Goldman Sachs economists said in a note, adding that the next key level to watch is 7. .20, which was last tested in May 2020.

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UBS economists also predict that the yuan will weaken further against the US dollar, given the “divergent monetary policy trajectories between the United States and China and the slowdown in Chinese exports”. UBS’s Wang predicts that USD/CNY will trade around 7.15 by the end of 2022.

But with the 20th National Congress approaching on Oct. 16, economists at Goldman Sachs don’t expect to see any sudden movements in the currency.

“We don’t expect a very steep CNY depreciation – as stability would be preferred around such a key political event,” they added.

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