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China's Economy May Have Done Well in August But Outlook Remains Grim

An employee operates a spinning machine at a textile factory on May 26, 2022 in China. China’s factory activity contracted at a slower pace in May as Covid-19 curbs in major manufacturing hubs were relaxed, but movement controls still depressed domestic demand, restrained production and weighed on the economy in the second quarter.
Zhu Haipeng | Visual China Group | Getty Images
  • UBS downgraded its full-year growth forecasts from 3% to 2.7% for 2022 and from 5.4% to 4.6% for 2023.
  • Zero-covid policy has essentially "stomped on human investor confidence in China," said Mattie Bekink, China director for the Economist Intelligence Corporate Network.
  • Goldman Sachs economists said the next key level to watch for the Chinese currency is 7.2 against the dollar.

Despite an upbeat batch of economic data from China last week, including retail sales and industrial production beating estimates, economists are standing by their pessimism.

UBS downgraded 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 bear more fruit in Q4, the Covid situation will likely remain challenging into the winter and early 2023, and export growth is set to slow," UBS chief China economist Tao Wang said in the note.

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

But those restrictions have dragged down investor sentiment and that's unlikely to rebound any time soon, Mattie Bekink, China director for the Economist Intelligence Corporate Network, said ­­on CNBC's "Squawk Box Asia."

"We're not seeing the policy-levers being pulled necessary to facilitate a change," she said of the nation's zero-Covid policy. "Essentially zero-Covid has stomped on human investor confidence in China."

Commenting on sporadic regional lockdowns across China, she said, "It's kind of a chokehold on China's economy at the moment."

Weaker yuan

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

"We expect CNY weakness to persist in the near-term, underpinned partly by broad USD strength," Goldman Sachs economists said in a note, adding the next key level to watch is 7.20, which was last tested in May 2020.

UBS economists also predict the yuan will weaken further against the U.S. dollar, given the "diverging U.S.-China monetary policy trajectories and slowing Chinese exports." UBS' Wang sees USD/CNY trading 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 for the currency.

"We do not expect to see very sharp depreciation in the CNY - as stability would be preferred around such a key political event," they added.

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