Goldman Sachs is betting that Chinese stocks will deliver a 23 to 29 per cent upside this year, after its bottom-of-the-pile ranking last year, but clients have some reservations following widespread Covid-19 lockdowns. Scepticism of China’s ability to achieve its 5.5 per cent gross domestic product target has risen among the investment firm’s mainland clients, including private equity funds, hedge funds and asset managers. These clients have slashed their GDP growth targets for the year, as China battles its worst Covid-19 outbreak since 2020. “A majority of local clients think [around] 4 per cent GDP growth is probably more realistic,” said Goldman analysts including Maggie Wei in a note published on Friday. “Having said that, local clients have mixed views on whether Chinese policymakers would tone down or change the GDP growth target this year.” Even as doubts about China’s challenging growth target pile up, amid the lack of concrete policy easing and global stagflation woes, the US bank remains bullish on China. It forecast a 23 per cent upside for the MSCI China Index over the next 12 months, after a disastrous 22 per cent slump last year as the worst-performing stock benchmark. For the CSI 300, it expected a 29 per cent upside over the next 12 months. China stock buybacks get seal of approval as Goldman sees winning run Goldman’s China clients are not ruling out further Covid-19 outbreaks this year, with the economic cost of containing the pandemic mounting. To stamp out the virus, China saw several large cities including Shenzhen and Shanghai institute citywide lockdowns in March, further weighing on the world’s second-largest economy and threatening to derail global supply chains already under strain. As of Friday, Goldman Sachs estimated multiple sectors accounting for about a quarter of China’s GDP to be either high or medium risk. Lockdowns are economically costly and sent China’s manufacturing and service sectors into contraction in March, said Sophie Altermatt, an economist at Julius Baer. It was the first time both sectors simultaneously contracted in China since the initial Covid-19 outbreak in early 2020. “Surveyed manufacturing firms reported supply and production disruptions and bottlenecks in logistics, as well as rising cost pressures and a drop in new export orders stemming from geopolitical instability,” said Altermatt, revising China’s economic forecast to 4.7 per cent in 2022. Sentiment on China’s growth and policy support turned more pessimistic last month, Goldman noted of its China clients. “Local clients [are] focusing on the Politburo meeting to be held in late April as the occasion for a potential change in the GDP growth target and the macro policy stance towards more aggressive easing.” Another concern weighing on investors’ minds was signs of stagflation globally and in the US. Slower US growth would weigh on Chinese exports and more aggressive US interest rate hikes heighten outflow pressures for China, said Goldman analysts. “Local clients also worry about the transmission channel through equity markets – should the US equity market correct due to aggressive Fed tightening, risk-off sentiment might also affect the onshore equity market,” they added. Still, Goldman predicts Chinese stocks will redeem themselves this year, even with its economists’ full-year GDP forecast of 4.5 per cent. They expect the Chinese government to intensify policy accommodation, which would be conducive to Chinese equities. Meanwhile, shifts in China’s Covid strategy such as containing outbreaks at the lowest social cost and other tweaks in virus detection and treatment protocols may help to “curb Covid policy-induced growth fears among investors at the margin”, said Goldman strategists including Kinger Lau in a note published on March 27.