China may become the key cause for global recession if it occurs again as the potential risks arising out of the country may pose a huge threat to the global economy.
"The last recession was led by US, but China is likely to usurp that not-so-coveted position," Ruchir Sharma, head of emerging markets and global macro, Morgan Stanley Investment Management, told CNBC-TV18.
The subprime mortgage crisis in the US was the main reason behind the last global recession that took place in 2008. According to the International Monetary Fund (IMF), it was the worst global recession since the World War II.
The improved economic situation in the US is currently not a concern for the global economy. Besides, the US central bank is highly expected to start raising interest rates for the first time since the crisis of 2008, on the back of improving labour market and rising economic activity.
But the current situation in the world's second largest economy China is of big concern for the global economy. Stock markets in China have turned highly volatile since June, after gaining by over 150 percent in the past one year. The benchmark Chinese equity index Shanghai Composite fell 8.5 percent on Monday, posting its worst one-day decline since February 2007.
The fall in stock markets happened despite the Chinese government's efforts to shore up the sentiment. The crash in Beijing's stock markets is also led by investors' rush to book profits as uncertainty rose over the government's additional measures to support the markets.
"China is neither in control of its equity market, nor its overall economy and that poses a significant global economic risk," Sharma said.
The government has rolled out a $500 billion securities fund to buy shares in the domestic markets and keep investors' confidence intact. In addition, the monetary easing measures announced by the Chinese authorities' in the past months to improve economic activity seems to have a lesser impact.
A severe downturn in the economy will have a significant impact on other major economies of the world, probably leading to another recession.
The debt situation of local governments in China is also of huge concern to the country's economy. Since the crisis of 2008, these governments have been spending a lot of money to drive the economic growth and have accumulated alarming levels of debt.
"This time it (recession) could well be led by China just because the size of the Chinese economy is so big in the global economy and that's where the vulnerability lies given the debt build-up that China has seen over the last few years," said Sharma.
