The International Monetary Fund today warned that a sharp economic slowdown in China would hit not only the world's second-largest economy but also the rest of Asia-Pacific region hard.
''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 on the sidelines of the annual fall meeting of the IMF and the World Bank in Lima.
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 the 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 sizeable, 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.
IMF said China continues to rebalance its economy toward domestic consumption and services and away from credit-led investment.
From the heyday double digit growth, China's economy had declined to 7.7 per cent 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.
Last month, China had trimmed its growth estimate for 2014 to 7.3 per cent from 7.4 per cent, already the weakest in 25 years, in a move set to spark concerns about the health of the world's second-largest economy days after fears of a slowdown triggered global stock market panic.