Effects of any hard landing for China would reverberate around the world

Long-standing worries about China's high leverage, property bubble and excess capacity have been fuelled by recent interbank liquidity squeezes and troubles in the trust market, which have led to renewed fears of a hard landing or even a financial crisis.

Structural issues notwithstanding, we don't expect a hard landing or systematic financial crisis in the near term. GDP is projected to grow by about 7.8 per cent this year, led by improving exports and recovering consumption, which should offset the slowdown in investment, especially in infrastructure. Credit growth may well slow but be sufficiently robust to support economic growth.

However, as the government moves to slow the pace of leveraging as the risk of shadow credit default rises, volatility in interbank liquidity and credit growth is the major risk this year.

But what if a big credit event caused a sharp deleveraging, or there was a grave policy error or big external shock? In such a case, a financial crisis would still be very unlikely, but a big slowdown in growth could occur. How might such an outcome affect the rest of the world and what economies are most at risk?

Given China's importance in the global economy, it is probably safe to say that everyone would be affected. Nevertheless, economies with extensive trade and financial ties with China are most at risk, though others may be affected.

Trade links are pivotal, given that China is the world's largest exporter and third-largest importer. Economies in East and Southeast Asia as well as major commodity exporters are most exposed. They include Mongolia, Hong Kong, Taiwan, Australia, Korea, Japan, Southeast Asia and commodity exporters in Latin America and Africa.

Financial linkages between China and other economies are much less extensive, since Beijing maintains substantial capital controls. In general, the scale of lending to Chinese entities by foreign banks is limited as are overseas activities of Chinese banks. The exceptions are Hong Kong and Singapore, where banks have built up sizable exposure to China's banking and corporate sectors in recent years.