IMF Sees Risk Of Deeper China Slowdown If Euro Crisis Worsens
2012-02-06 16:23:14
The Chinese economy will experience nearly 4 percentage points reduction in its growth rate projected for this year if the debt crisis in Europe intensifies, the International Monetary Fund (IMF) said on Monday.
In a report published in Beijing, the Washington-based lender warned that the risks to China from Europe are both "large and tangible." The Chinese growth rate is forecast to drop abruptly if the Euro area experiences a sharp recession.
The rate of growth in China's gross domestic product is expected to fall to 8.25 percent this year from 9.2 percent in 2011, with the slowdown gathering speed in the latter part of this year. Thereafter, the rate is seen rising to 8.75 percent in 2013.
Net exports will prove to be a significant drag on growth in the coming two years, the IMF report said, and the current account surplus is expected to remain at 3-4 percent of GDP.
The IMF said some modest fiscal support to the Chinese economy is warranted, given the uncertain global outlook. Therefore, the lender urged the authorities to defer the plans for fiscal consolidation and to target a general government deficit of around 2 percent of GDP for 2012.
If a tail risk of financial volatility emanates from Europe, it would drag China's growth lower, the IMF report said. The channels of contagion would be felt mainly through trade, with knock-on effects to domestic demand, it added.
However, China's closed capital account would provide some protection from financial spillovers, the IMF said.
The IMF urged China to respond with a significant fiscal package, executed through central and local government budgets, rather than the banking system, if such a downside scenario becomes reality.
It also noted that inflation has reached more comfortable levels by the end of 2011 and may continue to decline steadily in the first few months of this year.
The IMF said the government's efforts to cool the property sector have been effective and the market is now beginning to deflate. However, the lender sees little reason to backpedal on the government's measures.