China’s economic growth is likely to have peaked in the first quarter of this year and how the government will manage the slowdown is seen as one of the key uncertainties facing the country’s economy.
In a note the ratings agency said Chinese policymakers have tightened monetary policy and cracked down on shadow-banking activities in recent months as part of a shift toward containing financial risks. But it points out that crackdown came against a backdrop of strong Gross Domestic Product growth of about 6.9 percent in Q1.
“The policy response to an anticipated growth slowdown is one of the key uncertainties clouding the outlook for China’s economy,” it said. “It is possible that policymakers have switched priorities, and will allow growth to slow more rapidly in order to avoid adding further to financial risks through additional stimulus. In that case, monetary policy could remain broadly unchanged over the rest of the year, and we would then expect a more pronounced lowering of growth targets in 2018.”
However, it says that the government will also face pressure not to allow the economy to slow too fast, which may have the opposite effect and lead to a relaxation of those financial regulations.
“Indeed, the last time policymakers faced this dilemma – when tighter restrictions on local government financing put the growth target under threat in 2015 – the response was to relax the restrictions.”