An economic crisis in China could result in a world-wide recession, warned the International Monetary Fund (IMF). This was because China's financial links with the rest of the global economy was set to increase, the organisation said ahead of its spring conference in Washington next week. "It is likely that China's spillovers to global financial markets will increase considerably in the next few years", the IMF said.
The warning comes at a time when there is continuing concern over the China slowdown and amid the Beijing government's efforts to shift its manufacturing dependent economy to one that is more dependent on domestic consumption.
It also comes at a time when the central banks of developed nations such as the US Federal Reserve are taking a call on raising their interest rates after taking into account the economic activity in China and other emerging markets.
The IMF said the impact of emerging economies on developed nations had increased to such an extent that "spillovers" now accounted for one-third of price movements across equity and foreign exchange markets of developed nations. The financial impact of China was also said to grow because of the opening up of its local bond and other markets to foreign investment. "China's financial integration with the rest of the world is expected to accelerate, and its financial influence abroad will likely catch up with its economic prowess" the IMF said.
To cite a recent example, the Chinese turmoil at the start of 2016 gave the world's stock markets the worst start to a year since the financial crisis. The FTSE 100 index lost 5% or £81bn (€101.42bn, $115.49bn) in value, because of a crisis in Beijing. Last week, the Bank of England is said to have considered a Far East crash as one of the possible reasons for the next recession.
To avoid a crisis in China's economy, IMF said that China has to have a "clear and timely communication of its policy decisions, transparency about its policy goals, and strategies consistent with achieving them will, therefore, be essential to ensure against volatile market reactions, which may have broader repercussions."