China may force the global economy to stare at recession says Morgan Stanley

The volatile development around the Chinese markets has spooked setiments around the world. Now in an even more cautious warning Ruchir Sharma, Head of emerging markets at Morgan Stanley Investment Management in a televised interview to Bloomberg, said a continuation of China's slowdown in the next years may drag global economic growth below 2 per cent, a threshold he views as equivalent to a world recession. It would be the first global slump over the past 50 years without the US contracting.

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

According to Reuters, China's four-week-long stock market rout has wiped almost 28 per cent off the Shanghai Composite Index and also inflicted pain on Asian firms most exposed to its mammoth economy.Korean exporters, Australian miners and Japanese tourism companies and exporters have also tumbled much more than their respective markets

Beijing's direct and indirect involvement in the market over the past several days includes tactics from buying shares to warnings by police against betting on share-price falls. On Sunday, China's securities regulator said it was ordering securities firms to monitor a rising number of illegal trading accounts-those opened on behalf of "institutions and individuals" other than those named on the account.The intervention has drawn parallels with the way governments around the world had reacted to shore up the financial system and key companies in the aftermath of the Lehman Brothers collapse and ensuing financial crisis.

China, which has set its own growth target at about 7 per cent for 2015, is due to publish its latest gross domestic product (GDP) report on Wednesday . The release is expected to show growth dipped below 7 per cent in the second quarter, following 7 per cent expansion in the first quarter of 2015 - the weakest showing since the global financial crisis.

The International Monetary Fund last week cut its forecast for global growth this year to 3.3 per cent, down from an estimate of 3.5 per cent in April.

"What happened in China last week was so significant in that for the first time, you've got this sign that something is out of control," Ruchir Sharma said. "Confidence damage is going to last for a while."

From here on the recovery on the Chinese stock market is key to not just China's reform drive but also on the impact it will create over the global economy.