The growth rate of China could be cut in half this year if Europe's debt crisis worsens significantly, the International Monetary Fund (IMF) has warned.

China's vulnerability to the slump in global demand has been highlighted by the IMF in an economic outlook report on the world's second largest economy. According to the report, China's growth could drop by as much as four percentage points this year from its current forecast of 8.2 percent. China's growth rate would drop abruptly if the euro area experiences a sharp recession. In the unfortunate event such a downside scenario becomes a reality, China should respond with a significant fiscal package, the report warned.

The report is a reminder that China has a huge stake in Europe's stability and should be ready to contribute more money to an IMF-led rescue mission. China still has a long way to go to digest the side effects of the surge of credit unleashed in the wake of the global crisis. A large external shock would bring many of these domestic risks more forcefully to the forefront, the report added.

The IMF recommended that China respond with a fiscal package of around three percent of GDP to be spent on reducing taxes, subsidizing purchases of big-ticket consumer items, improving social services and ramping up the country's already enormous social housing plan. 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 continued. The report has stated that such a plan would still allow China to attain a growth rate of around 7.2 percent this year, even if Europe were to slip into a deep recession.