China's annual economic growth could be cut nearly in half this year if Europe's debt crisis tips the world economy into a recession, putting pressure on Beijing to unveil significant fiscal stimulus, the International Monetary Fund said.
The Fund outlined its central scenario for China's 2012 growth outlook in its global outlook in January, cutting its forecast for 2012 growth from 9 percent to 8.2 percent.
The China Economic Outlook published on Monday showed that under the IMF's downside forecast for the global economy, China's growth rate may be cut by around 4 percentage points from the fund's current forecast of 8.2 percent in 2012.
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, it said.
Stimulative measures could include cuts in consumption taxes, subsidies for consumers, corporate incentives to expand investment, fiscal support for smaller firms and more spending on low-cost housing social safety nets, the fund said.
Such fiscal stimulus, adding up to 3 percent of GDP, would help mitigate declines in economic output, it said.
A Reuters poll in January showed China's economic growth is likely to moderate to 8.4 percent from 2011's 9.2 percent as demand at home and abroad slackens.
Falling inflation will enable the People's Bank of China to fine-tune policy to support growth through its open market operations in the coming weeks, the IMF said. It said the central bank could opt to cut banks' reserve requirement ratio again if capital inflows remain subdued.
The central bank announced a cut in the amount of cash that banks have to hold as reserves -- the first such cut in three years -- at the end of November. More reserve ratio cuts are expected in coming months.
(Reporting by Kevin Yao; editing by Patrick Graham)