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China may allow economy to slow more than market predicts: S&P Global Ratings

The Chinese Politburo's midyear review suggests the country is unlikely to turn to major stimulus to boost the economy even as growth slows amid an ongoing trade dispute with the U.S., according to S&P Global Ratings.

"Chinese authorities may have a greater tolerance for economic deceleration than the market expects," said S&P Global Ratings China country specialist Chang Li.

While Chinese GDP growth remained above 6% in the first half of the year, a threat from U.S. President Donald Trump on Aug. 1 to impose 10% tariffs on a further $300 billion of Chinese goods may further dampen investment in China's manufacturing sector, S&P said in a report that didn't constitute a ratings action.

The authorities are likely to remain focused on stoking domestic demand, directing funds towards manufacturing and consumer sectors, while selectively withdrawing funds from some areas of the economy, particularly property, which is showing signs of overheating, S&P said.

China will continue to focus on reforms, including allowing loss-making state-owned enterprises to fail by severing financial support for them, S&P said. Default risk for Chinese companies is also rising as funding conditions for privately owned enterprises remains tight.

The rating agency said the rate cut by the U.S. Federal Reserve opens the door to potential monetary easing in China in the event of significant economic deterioration, S&P said while allowing flexibility in the yuan against the dollar to absorb the impact of tariffs to some extent.

Unable to match the U.S. dollar-for-dollar on tariffs, China on Aug. 5 responded to Trump's latest escalation in the trade war by allowing its currency to weaken past 7 per dollar for the first time in 11 years.