Goldman Warns of China Economy Risks During Year of the Rooster

China’s economy may have slipped down the global worry list, but significant risks remain, including an abrupt end to a massive credit boom or an overly aggressive policy response if inflation should speed up, according to Goldman Sachs Group Inc.

While a hard landing isn’t the New York-based bank’s base case for 2017 -- it expects only a modest slowdown -- economists warn that a push to rein in cheap loans will weigh on key sectors such as housing. Officials are trying to keep a lid on frothy house prices without harming the wider economy, where growth remains heavily reliant on government spending.

The scale of the lending boom was laid bare in data Tuesday showing China added more credit in January than the equivalent of Swedish or Polish economic output, fueling worries about the spree’s sustainability. Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545 billion). Despite the headline number, the growth of total credit continues to ease moderately, according to Bloomberg Intelligence.

Policy makers have begun to tighten money market rates and analysts expect further measures to cool lending without choking the wider economy, especially amid important political changes with a major Communist Party leadership reshuffle set for later this year.

Read More: China Tightens Monetary Policy by Raising Money Market Rates

Economic threats aren’t all home grown. External risks include a sharp drop in exports due to slowing demand or rising trade barriers -- U.S. President Donald Trump has promised tariffs on Chinese goods -- and faster-than-expected rate hikes by the Federal Reserve.

“We see the biggest risks in China centering on the country’s rising credit imbalances, with mis-calibration of policy or a sharp external shock as possible triggers of a sharp tightening in credit conditions and hard landing in growth,” economists led by Andrew Tilton wrote.

A slowing China would have spillover consequences for all of Asia, especially smaller open economies that rely heavily on trade. Commodity prices would suffer with knock-on effects for producers such as Indonesia and Australia. A combination of decelerating Chinese growth and financial market volatility would also reverberate around the world through pushing the dollar higher and knocking equity prices, the analysts cautioned.

“Open Asian economies, particularly those with commodity exposure and/or dollar indebtedness, remain the most vulnerable to a hard landing in China,” they said.

To be sure, China has buffers to offset any shock including a large current account surplus, robust net international investment position, low external debt and still-substantial foreign exchange reserves, the economists noted.