(Sept 27): Morgan Stanley joined other major investment banks in predicting that China will likely ease Covid-19 restrictions and reopen the country by spring next year, providing a possible boost to the economy’s recovery.
Pressure to reopen will build because China's zero-Covid strategy has led to significantly weaker income growth and a sharp rise in youth unemployment, outcomes that are at odds with Chinese President Xi Jinping’s policy goal of “common prosperity”, according to Morgan Stanley.
“Reopening appears the remaining meaningful tool to manage the economy,” analysts led by chief Asia economist Chetan Ahya wrote in a note on Monday (Sept 26). Given the spillover effects of weaker export growth and a continued drag on the property sector, easing Covid-19 controls would revive consumption and services spending, they said.
Goldman Sachs Group Inc said last week China likely won’t begin reopening before the second quarter of next year, while Nomura Holdings Inc sees possible easing after March, once a reshuffle of China’s top leadership is completed. Both banks predicted a surge in infections once controls are lifted and a disruption to economic activity. They cut their 2023 growth outlooks to under 5%.
Morgan Stanley said that a spring reopening would likely strengthen economic growth to about 5.5% by the second half of next year, compared to a subpar increase of around 3% from the third quarter of this year to the first quarter of 2023.
“A reopening will happen, not because the rest of the world is now living with Covid-19, but because the effects of China’s strict Covid-19 management are now increasingly at odds with its policy objective of achieving common prosperity,” the economists wrote.
Officials will likely take steps in the next three to six months to prepare for a reopening, Morgan Stanley said, including a renewed booster campaign, reshaping public attitudes on the virus, and ensuring adequate medical facilities and treatment methods.
While traders are looking to the Communist Party’s congress next month for possible policy announcements to boost areas like the slumping property sector, the investment bank warned the likely outcome is a “muddling through” for the housing industry.