Made in China: The Next Global Recession

The next global recession could be caused by a continuation of China's slowdown, warns Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management.

In an interview with Bloomberg, Sharma says that global economic growth could fall below 2 percent if China’s slowdown continues in the next years.

China has become the world’s second-largest economy, accounting for 38 percent of the global growth last year, up from 23 percent in 2010, according to Morgan Stanley.

The International Monetary Fund last week said it has left its projection on China unchanged at 6.8 percent, the slowest since 1990.

Sharma notes that China’s economy will continue slowing as the country struggles to reduce its debt. An additional 2 percentage point slowdown would be enough to tip the world into a recession.

The plunging stock market further adds to China's economic woes. The Shanghai Composite Index slumped more than 30 percent in four weeks through June 8, wiping out almost $4 trillion in market value.

The government has taken emergency measures to prevent the stock market from crashing, but shares continue to stumble.

“China's state-sponsored stock-market rally is unraveling, with potentially dangerous consequences," Sharma wrote in an article published by The Wall Street Journal on July 7, 2015.

“The signs of overtrading are hard to exaggerate. The total value of China's stock market is still less than half that of the U.S. market, but the trading volume on many recent days has exceeded that of the rest of the world's markets combined.”

For now, Sharma is avoiding Chinese stocks and those in countries that rely on China for growth, including South Korea. He favors companies in eastern Europe and smaller Asian countries, such as the Philippines and Vietnam.

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