China’s economy may have done well in August, but the outlook remains bleak

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Despite a positive set of economic data from China last week, including retail sales and industrial production beating estimates, economists remain pessimistic.

UBS lowered its full-year growth forecasts from 3% to 2.7% for 2022 and from 5.4% to 4.6% for 2023.

“While some of the current policy support will pay off more in the fourth quarter, the Covid situation is likely to remain challenging into the winter and early 2023, and export growth will slow,” UBS chief economist Tao Wang said in the note.

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

But those restrictions have dragged down investor sentiment and that’s unlikely to recover anytime soon, Mattie Bekink, China director of the Economist Intelligence Corporate Network, said on CNBC’s “Squawk Box Asia.”

“We’re not seeing the policy levers needed to facilitate change,” she said of the nation’s zero-covid policy. “Essentially zero-Covid has eroded human investor confidence in China.”

Commenting on sporadic regional lockdowns across China, she said, “It’s kind of a stranglehold on the Chinese economy at the moment.”

weaker yuan

Economists also expect the Chinese currency to weaken further even after the onshore and offshore yuan both fell to their lowest levels since July 2020 last week.

“We expect CNY weakness to continue in the near term, supported in part by broad USD strength,” Goldman Sachs economists said in a note. The next key level to keep an eye on 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 “difference in monetary policy stances between the US and China and slowing Chinese exports”. Wang of UBS sees USD/CNY trading around 7.15 by the end of 2022.

But as the 20th National Congress approaches on Oct. 16, economists at Goldman Sachs don’t expect any sudden moves for the currency.

“We do not expect a very sharp depreciation of the CNY – as stability is favored around such an important political event,” she added.



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