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Tags: IMF | Europe | China | Growth

IMF Warns Europe Downturn Could Cut China Growth

Monday, 06 February 2012 06:52 AM EST

A sharp downturn in Europe could cut China's economic growth rate nearly in half, the International Monetary Fund said Monday, adding to warnings about a possible severe global slowdown this year.

The IMF said Beijing should be ready to launch a multibillion-dollar stimulus to ward off a slump in the world's second-largest economy.

The IMF is forecasting 8.2 percent growth this year for China but said that could be reduced by up to 4 percentage points if Europe's crisis causes large declines in credit and output.

"The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere," it said. "In the unfortunate event such a downside scenario becomes reality, China should respond with a significant fiscal package, executed through central and local government budgets."

China rebounded quickly from the 2008 global crisis and its economy expanded by a healthy 9.2 percent last year but growth has declined as Beijing tightened credit and investment curbs to prevent overheating.

China's leaders have responded to a plunge in global demand promising bank lending and other aid to struggling entrepreneurs. The government warned last month it faces "complexity and challenges" due to global malaise.

The World Bank, which is the IMF's sibling organization, told China and other developing countries last month they should prepare for a global slump that it warned might hit them harder than the 2008 economic crisis.

The IMF said its "global downside scenario" envisaged bigger-than-expected losses to banks on private sector lending and sovereign debt, a contraction in investment and slower global economic activity.

The IMF said a stimulus equal to about 3 percent of China's annual economic output spread over 2012-13 would limit the decline in Chinese growth to about 1 percentage point. That would be about 460 billion yuan ($75 billion).

China's banks might be shielded by barriers that keep its financial system sealed off from global capital flows, the IMF said. But it said a sharp fall in Western stock markets might disrupt trade credit.

The government of Hong Kong, a Chinese territory with its own financial system, announced last week it will spend 80 billion Hong Kong dollars ($10.3 billion) this year on stimulus measures.

Citing anemic trade, it said the Hong Kong economy could grow by as little as 1 percent this year after slowing to 3 percent in the final quarter of 2011.

© Copyright 2023 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Monday, 06 February 2012 06:52 AM
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