China's red-hot economic growth is slowing and inflation may be peaking, but analysts say Beijing won't relax a tough tightening policy any time soon.
While controls on lending and investment are likely to stay in place for several months, economists say Beijing may start rolling them back if it seems the economy, the world's seventh biggest, is heading for a bust.
Alarm bells would go off if growth in the year through the third-quarter slowed to 7 or 8 percent, economists said.
"The China slowdown has barely begun," Morgan Stanley chief economist Stephen Roach said in a research report this week.
"The nation's authorities cannot afford to ease off on their campaign of policy restraint. If they do, an overheated Chinese economy runs the serious risk of a destabilising hard landing," Roach said.
The economy grew 9.6 percent in the year through the second quarter, a softer-than-expected performance that officials said showed the effectiveness of the clampdown, which included telling banks to keep more money in reserve, banning investment in some industrial projects, and soaking up cash in the financial system.
The economy may have grown very little between first and second quarters, if at all, say economists who calculate seasonally adjusted gross domestic product.
But most analysts said they expected Beijing to hold off on fresh tightening, such as an anticipated interest rate rise, for at least a few more months as policy makers wait for more data to confirm the cooling trend.
"The monetary policy will probably remain tight for some time, but a rate rise is unlikely to happen," said Xu Hongyuan, an economist at the State Information Centre, a government think-tank.
"The main task now is to prevent a sharp economic slowdown," Xu said.
NINE-YEAR HIATUS: China's benchmark one-year yuan lending rate is 5.31 percent while the one-year deposit rate is at 1.98 percent. Interest rates have not been raised for nine years.
Analysts think Beijing has held off on a rise because it would raise borrowing costs for state firms that rely on cheap loans for operating capital, forcing some into bankruptcy. A rise could also lead to more demand for the yuan, adding to pressure for an unwanted revaluation in the currency.
Although many analysts are optimistic that the economy will cool gradually, some analysts worry about a hard landing, which would see economic growth slow to perhaps less than 7 percent and a return of profit-damaging deflation.
"We fear that unless the government eases monetary policy, then the momentum of the slowdown may create below-trend economic growth and a hard landing," Barclays Capital analyst Desmond Supple said in a report.
Over the next couple months authorities may let the money supply rise, permit banks to lend more freely, and perhaps even cut bank reserve ratios, making more funds available for lending, Supple said.