A slowdown could lead to serious unemployment and social unrest in China and badly hit the country's trading partners, as well as global commodity and capital markets, the WEF warned yesterday.
Even a slowing from the galloping 10 per cent annual growth averaged over the past few decades to below 6 per cent would be enough to trigger damaging repercussions, it said.
An abrupt slowdown in the world's most populous nation was identified as the most likely of more than 36 threats to the world, with a probability greater than one in five.
Such a slowdown would also have huge impact, the WEF said in its Global Risks 2010 report, costing the world economy between $250 billion and $1,000 billion, it estimated.
Daniel Hofmann, chief economist with Zurich Financial Services and an adviser on the report, said that a Chinese slowdown was one of the three biggest economic threats.
A loss in momentum could affect global capital and commodity markets adversely. It might also affect China's huge drive to invest in Africa.
The WEF also suggested that China could be the source of a second economic threat — an asset price bubble — and pointed to rocketing property prices in Beijing and Shanghai as evidence of possible trouble ahead.
Beijing faced a number of challenges, including the need to rebalance itself away from dependence on exports towards greater domestic demand and the need to maintain a stable currency in the face of its growing accumulation of foreign reserves, the WEF said.
If Chinese growth were to fizzle out before the global recovery became more firmly established, the pain would be particularly acute for China's trading partners, it said.
Fiscal crises were the other big economic risk, the WEF said, as governments borrowed to rescue banks and fuel stimulus programmes to soften the recession.
Soaring government borrowing would put strong upward pressure on interest rates and "could lead to a full-fledged sovereign debt crisis", said the WEF, whose annual meeting of ministers and business leaders begins in Davos, Switzerland, later this month.
Mr Hofmann said: "Dubai and Greece [countries strugggling with excessive borrowings in recent weeks] were early warnings. They should be heeded." He added that such government borrowing was clearly unsustainable in the long run.
The WEF singled out the UK and the US as facing particularly tough choices. Britain had to determine how to time a gradual and credible withdrawal of fiscal stimulus to sustain the recovery but without triggering fears of a sovereign debt crisis. "Governments need to develop sound exit strategies and communicate them clearly to reassure investors and taxpayers," it said.
China, the world's third-biggest economy after the United States and Japan, has helped pull the world out of the recent slowdown, thanks to its insatiable demand for energy and raw materials. A deliberate decision by Beijing to take the brakes off bank lending helped the economy to accelerate last year, although the authorities have started to reverse that policy in the past few days in the face of worries about overheating.
Other economic threats identified by the WEF included oil price spikes, food price volatility, a major fall in the US dollar, the burden of regulation and underinvestment in infrastructure.
