Domestic dangers also pose threat, fund warns

China Economy IMF

The worsening crisis in the euro zone poses a “key risk” to China’s economic growth, the International Monetary Fund (IMF) has claimed.

The fund also noted that the world’s most populous nation faces “domestic risks” as well, pointing in particular to a worse-than-expected fall in the property market.

China’s economy expanded to an annual rate of 7.6% in the second quarter, but growth rates hit a three-year low.

However, the IMF also claimed that China had the fiscal capabilities “to respond forcefully” to any internal or external risks that it might face, and forecast an 8% growth rate in the current financial year.

This figure may be as much as halved though if China fails to respond adequately to the current debt crisis in the euro zone.

“The main external risk continues to be spillovers to China from a worsening of the euro area crisis,” the fund claimed.

“Assuming no policy response in China, growth could decline by as much as four percentage points in response to a one and three quarter percentage point slowdown in global growth.”

Internal risks could also pose a danger to China’s economy. Some experts fear the impact of a property market crash on China’s economy after Chinese banks lent huge sums, boosting the property market, in a bid to maintain growth during the global downturn.

The Chinese Government has introduced a number of measures to prevent a crash in the property market, such as limiting the number of homes a person can own. However, this has resulted in falling property prices across the country.

The fund also warned that local government debt posed a risk to economic stability, adding that officials must “closely monitor and control the risks related to borrowing by local entities, especially local government financing vehicles.”

In addition, the IMF urged China to support domestic consumption.

What impact could a euro zone implosion have on the Chinese economy?

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