Europe’s debt crisis could as much as halve China’s annual economic growth this year, according to the International Monetary Fund.

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On Monday, the IMF published its China Economic Outlook, forecasting China’s growth rate may be cut by around 4 percentage points from the fund’s current forecast of 8.2 percent in 2012.

“In the unfortunate event such a downside scenario becomes reality, China should respond with a significant fiscal package, executed through central and local government budgets,” the IMF said.

The IMF suggested a host of stimulative measures that China could take, including consumption taxes, subsidies for consumers, corporate incentives to expand investment, fiscal support for smaller firms, and more spending on low-cost housing social safety nets.

In adding up to 3 percent of gross domestic product, the IMF suggests that such fiscal stimulus would help mitigate declines in economic output.

Furthermore, falling inflation will enable the People’s Bank of China to adjust policy to better support growth through its open market operations in the coming weeks, the IMF said.

At the end of November, the central bank announced a cut in the amount of cash banks have to hold as reserves. The IMF suggested that the central bank could cut reserve requirement ratios again if capital inflows remain subdued.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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