An escalation of trade tensions could add to defaults in China’s financial system, which is already in the midst of a deleveraging campaign, according to JPMorgan Chase & Co.

If U.S. President Donald Trump imposes sweeping tariffs on Chinese imports later this week, there will be spinoff effects on the country’s financial sector, according to Jing Ulrich, JPMorgan’s vice chairman for Asia Pacific. Consumer demand and the wider economy are likely to weaken and that “may translate into worse credit quality down the road,” Ulrich said in a Friday interview in Hong Kong.

That would add to some Chinese firms’ repayment difficulties at a time when the country is already seeing bond defaults, she said. Bank shares fell sharply on Monday ahead of the July 6 deadline for a decision on whether Trump will slap tariffs on $34 billion of Chinese goods, a move Beijing has vowed to match. China’s smaller banks are most vulnerable to the outbreak of a trade war, Ulrich said.

China’s steps to cut debt are already straining liquidity in its banking system. The nation’s broadest measure of new credit slumped in May to the lowest in almost two years. Net financing by company bond sales turned negative for the first time since last June, with more debt maturing than was issued, central bank data show.

Even so, China is better placed than most of its emerging-market peers to weather any trade war, Ulrich said. Effective currency and capital controls have contained outflows, market valuations are “much more reasonable” than they were during the meltdown of 2015, and China’s biggest banks benefit from strong capital ratios, she said.

JPMorgan predicts China will lower borrowing costs for cash-strapped companies, such as small firms and those in the property sector, to avert a rise in delinquencies. The bank is penciling in two further cuts in reserve requirements later this year as a way to stimulate more lending and ease pressure on Chinese companies.

“The risk can be reduced, by releasing more liquidity,” Ulrich said. “China’s leadership has more tools at hand.”