Euro Crisis a Danger to China, IMF Warns

Beijing. 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 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 has tightened credit and investment curbs to prevent overheating.

Separately, Moody’s Investors Service says the sovereign crisis in the euro area has increased the threat of a contagion in Asia and is the greatest risk to the generally robust credit profiles of Asia-Pacific banks.

Since the second half of 2011, it said, there has been a broad slowdown in Asian exports, general weaknesses in Asian currencies that have reversed their earlier strengths and increasing anecdotal evidence of European banks selling their portfolios of Asian loan books.

Its report on Monday lists five downside risk scenarios: contagion risk from Europe’s sovereign crisis; the possibility of a hard landing for the Chinese economy; the bursting of real estate bubbles in Asia; a downturn in commodity prices; and a downturn in the Australian property market.

“These are not our central scenario, but what we consider as ‘tail risks,’ or low-probability, but potentially high-impact events that warrant close monitoring over the coming 12 months,” says Stephen Long, a Moody’s managing director for the Financial Institutions Group in Asia Pacific.

While banking systems in the Asia Pacific are expected to remain generally resilient, Australia, New Zealand, South Korea and Vietnam are most exposed in the event that the euro area continues to deteriorate, Moody’s said

Moody’s also classified 10 banking systems in the “exposed” category: Cambodia, China, Hong Kong, India, Japan, Malaysia, Mongolia, Singapore, Taiwan, and Thailand. Those in the “less exposed” category are Indonesia and the Philippines.

AP, JG

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