Morgan Stanley: China slowdown raises fears of global recession

A Morgan Stanley executive has predicted that a continued slowdown in China would drag the world economy into recession.

Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, said in an interview with Bloomberg that if China continues to post lower growth rates in the coming years, growth in the world economy would be below 2% -- a threshold equivalent to recession.

If it happens, it would be the first global slump over the past 50 years without a contraction in the US, the world's largest economy.

"The next global recession will be made by China," Sharma said.

"Over the next couple of years, China is likely to be the biggest source of vulnerability for the global economy."

He added that China will continue to slow down given its huge debt pile, which its tries to reduce. If China dips by an additional 2 percentage points, that would be enough to take the world into recession, according to Sharma.

China is the second-largest economy in the world, contributing 38% of the global growth in 2014, up from 23% in 2010. The slowdown in China would directly affect a number of economies that primarily depend on trade with China.

The International Monetary Fund earlier cut its forecast for global growth in 2015 to 3.3%, down from 3.5% in April, citing weakness in the US.

China is targeting a full-year growth rate of 7% in 2015, compared to 7.4% in 2014. Chinese authorities believe the country would accept lower growth rates in the near term in order to build a strong economy with sustainable growth rates.

The country's transition to a new growth model poses a risk to the global recovery, according to Morgan Stanley.

China earlier recorded a 7% economic growth in the second quarter, beating economists' expectations, but the rate of expansion was the weakest since 2009.