Risks to the Chinese economy are expected to remain among the key risks to the global growth outlook in 2018, with the Asia Pacific region especially vulnerable to the shock waves from a slowdown.

“Significant economic imbalances continue to create downside risk to the outlook for 2018,” said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit in Singapore. The tightening of financial and environmental regulations to help curb debt may cause tremors in 2018 that slow housing and infrastructure construction, according to Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong.

“A sharper-than-expected slowdown in construction could thus weigh on broader activity with emerging sectors not yet vigorous enough to provide a sufficient cushion,” said Neumann. “The biggest fault line running through the Chinese economy is the construction sector.”

China’s steel production growth is also anticipated to slow sharply in 2018 as state-mandated factory closures and policies to safeguard the environment begin to bite. The world’s largest producer of the metal will experience just a small rise in output of 0.6 per cent this year, a poll of 15 analysts found in a Financial Times survey.

Steel is habitually seen as a barometer of economic activity because it is used in car making, construction and manufacturing, which means a substantial price move could have broader repercussions for the global economy.

However for the steelmakers, the Chinese slowdown could have positive effects. A modest rise in production from China, which accounts for about half the 1.7bn tonnes of steel in the world, could help to restore balance to a global market that was massively impacted by a collapse in prices two years ago due to oversupply.

The predicted slowdown comes despite a robust outlook for the Chinese economy and contrasts with a 5.7 per cent jump in its crude steel output during the first 11 months of 2017, according to World Steel Association figures.

Another issue weighing on China’s economic outlook is the possible U.S. interest rate raise. If the U.S. Federal Reserve raises interest rates more than markets expect and tax cuts build on underlying 3.2 percent growth, the dollar may get a second wind that puts the yuan and capital outflows under pressure again, according to George Magnus, an associate at Oxford University’s China Centre and former adviser at UBS Group AG.

Furthermore, should tension between the U.S. and North Korea escalate into a more significant confrontation, there will be profound and far-reaching consequences not just for China’s economy but that of the entire Asia-Pacific region, says Zhu Ning, deputy director of the National Institute of Financial Research at Tsinghua University in Beijing.

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