LIMA, Peru—The International Monetary Fund on Saturday warned that a sharp economic slowdown in China would hit hard not only the world’s second largest economy, but the rest of Asia-Pacific region.
“Given the sheer size of the Chinese economy, a negative growth shock there would hit the rest of Asia-Pacific region hard,” the IMF said in its Asia and Pacific Regional Economic Outlook Update released here on the sidelines of the annual fall meeting of the IMF and the World Bank.
Such a shock could come from failure to fully implement reforms (owing to reform fatigue, for instance), or from financial shocks and stronger-than envisaged financial linkages, which could make policy measures less effective in containing domestic financial contagion, the report said.
Ongoing efforts to rebalance the Chinese economy could also prove less effective than anticipated, leading to a sharp drop in demand, it noted, adding that a sharp slowdown in China would pose regional-growth risks through strong trade linkages and increasingly through impacts on financial market sentiment.
“Econometric estimates accounting for trade and financial linkages between China and the rest of Asia indicate that spillovers could be sizable, with a 1-percentage point drop in China’s GDP growth lowering Asia’s GDP growth by about 0.3 percentage points,” it said.
The effects could be potentially greater today given the growing linkages within the region, the IMF said, observing that weaker commodity prices would also impact growth in commodity exporters, including Australia, Indonesia, Malaysia and New Zealand.
Weak domestic demand in China suppresses its imports, increasing the risk of sharper-than-expected slowdown in its economy with global ripple effects, the economic outlook said.
Also weak demand in China’s export destinations, including core advanced economies, reduces China’s exports and also imports with it, given the role China has played as the key downstream leg in global value chains.
The IMF said China continues to rebalance its economy toward domestic consumption and services and away from credit-led investment.
From the heydays double digit growth, China’s economy had declined to 7.7 percent in both 2012 and 2013, the slowest pace since 1999, largely affected by the world economic crisis and declining exports due to global economic slowdown.
PNA/PTI