Falling demand around the globe and fears of a recession in the US and Europe may widen the impact of a China slowdown. China is particularly vulnerable to US and European economies and a recession could have far-reaching consequences for Beijing, says AXA Investment Managers.

In a recently published whitepaper, AXA examines the impact of weakening demand in developed economies on China, including how Chinese financial assets may react going forward. The investment management firm says that China may continue to grow at a subdued rate over the next year in case of a soft-landing of the US. Chinese exports to the US would slow and their contribution to China’s GDP may reduce.

AXA estimates the impact on China’s GDP in different scenarios in its report and gives an estimate of the slowdown. In case of a ‘crash-landing’ of the US economy, AXA sees China’s exports to the US fall by 20%.

Meanwhile, the Eurozone is facing surging inflation and an energy crisis, and AXA expects China’s exports to the region to slow while avoiding outright contraction. The asset manager assumes that Eurozone will fall into a mild recession. The whitepaper then discusses the impact on China’s GDP in the case of the various scenarios of the Eurozone economy.

“The ultimate worst-case scenario is the entire global economy falls into recession, creating a full-fledged shock to China’s external demand,” writes Aidan Yao, Senior Economist for Macro Research – Core Investments, at AXA IM, giving the extent of China slowdown.

Historically, a recession in the US does not bode well for Chinese equities, but AXA suggests that markets have already priced in a lot of the bad news from the US market.

Download the whitepaper here.