(Reuters).- Chances of a drastic slump in Chinese growth are small but it would cause a global crisis if it happened, Olivier Blanchard, who has just stepped down as chief economist of the International Monetary Fund, said on Thursday.
It came as a surprise to many following the recent turbulence in the world's number two economy, but Blanchard, who left the IMF two weeks ago, said its experts had spent a lot of time over the summer meeting Chinese officials and specialists.
"Based on the analysis of data that I have seen, I do not think the Chinese economy has slowed down very much so far," he told Reuters in an interview at the Cass Business School.
"I think the probability of a major decrease in growth in China is small."
The IMF's forecast of 6.8% growth this year in China and 6.3% in 2016 stuck out in a week in which U.S. bank Citi's renowned economist Willem Buiter suggested the world economy could be pulled into a two-year recession by China.
Societe Generale has also alked of a Japanese-style 'lost decade' there.
"You have to ask where the decrease would come from," Blanchard said. He said the rest of the world was unlikely to suddenly stop buying from China, while Chinese consumers would continue spending and worries about an excessive housing boom had also eased.
The trigger would have to be a collapse in investment by state firms and local authorities, which is unlikely, he said.
"It's true that they have often over-invested. It is true that they are sometimes too leveraged, but I think if they were to cut investment too much, the central Chinese government would make sure that the cuts remain limited. The same goes for local authorities," Blanchard said.
If that proved too optimistic, however, and China's growth rate did halve to 3 percent, there would be serious problems.
Would it cause another major global crisis? "The bar has been set very high by Lehman, but yes it would be big," he said.
It could be badThe impact on commodity prices would be particularly substantial. China represents around 50% of global steel and copper demand, for example, and a serious slowdown would affect commodity producers like Russia, Brazil and Saudi Arabia.
"There might well be big geopolitical implications," Blanchard said. "There would probably be bankruptcies of firms in emerging markets, firms involved in commodity production, firms with large dollar debts.
"All this could create large risk premiums, disturb the financial markets. In short, it could be bad."
Rating agency Moody's, whose forecasts for China are in line with the IMF's, said on Thursday that China's sovereign rating could withstand slower growth and greater volatility, and that Chinese companies it rates could cope with another 5-10 fall in the yuan.
Blanchard said the other major uncertainty hanging over the global economy is if and when the U.S. Federal Reserve will finally raise interest rates from the near-zero level they have been at since the global financial crisis.