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Chinese economic growth at risk from European downturn

• IMF predicts 8.2% growth in China this year
• Figure could almost halve if European crisis worsens
• China should respond with multi-billion dollar stimulus

A sharp downturn in Europe could cut China’s economic growth rate nearly in half, the International Monetary Fund said on 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% growth this year for China but said that could be reduced by up to four 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% 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 faced “complexity and challenges” due to global malaise.

The World Bank – the IMF’s sibling organisation – 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% of China’s annual economic output spread over 2012-13 would limit the decline in Chinese growth to about one percentage point. That would be about 460bn yuan (£48bn).

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 80bn Hong Kong dollars (£6.5bn) this year on stimulus measures.

Citing anaemic trade, it said the Hong Kong economy could grow by as little as 1% this year after slowing to 3% in the final quarter of 2011. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds