BEIJING - As China maintains its focus on deleveraging to reduce financial risk, the economy may be pressured this year by tight liquidity conditions and rising funding costs, according to a UBS report.

"The credit market is likely to face volatility this year and liquidity will remain tight, as new regulatory rules designed to reduce financial risk gradually come into effect," UBS economist Wang Tao said.

Wang expects the slower credit growth and higher funding costs to have a more notable impact on growth this year than in 2017.

"Sectors such as property development, local government platforms, those with excess capacity, and high polluting industries will feel the pinch of the funding squeeze," Wang said.

She said infrastructure investment growth could decelerate by 10-12 percent this year from 19 percent in 2017, as local governments face more restrictions in debt financing. Meanwhile, property developers may be less cushioned by good property sales as in 2017, and even consumer loans may face more scrutiny.

However, Wang said continued supply-side structural reform, more pass-through of higher costs down the supply chain, and robust export growth could boost corporate profits, potentially offsetting weakening credit growth.

The People's Bank of China (PBOC) may not raise the benchmark interest rates, but money market rates will move higher following three US rate hikes, according to the UBS report.

However, if consumer inflation surprises on the upside, the PBOC is likely to raise benchmark rates in the third quarter this year, according to Wang.