A sharp slowdown in the world's second largest economy China would hit global growth hard, according to a report by Fitch ratings agency, which warned of "significant knock-on effects" for the rest of the world.

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In its report published Tuesday, Fitch warned that a sharp slowdown in China's GDP growth rate to 2.3 percent during 2016-2018 "would disrupt global trade and hinder growth, with significant knock-on effects for emerging markets and global corporates. In turn, this would keep short-term interest rates and commodity prices lower for longer."

Global GDP growth is currently expected to be 3.1 percent in 2017, according to Oxford Economics' global economic model which was used by Fitch to frame its "shock" China scenario. But if a slowdown of such a magnitude materialized in China, Fitch said global GDP growth would slow to 1.8 percent in 2017.

As a result, any rise in US and euro zone short-term interest rates would be postponed, and oil prices would remain under pressure, Fitch said.

'Lower-for-longer in terms of growth, interest rates and commodity prices, could be the defining mantra of this decade for the major advanced economies if a Chinese shock scenario materializes,' Bill Warlick, senior director of Macro Credit Research at Fitch, noted in the study.

While Fitch emphasized that this hypothetical scenario did not reflect its current expectations for China's growth, it was "designed to test credit connections between China and the rest of the world."

Collateral damage

In terms of these "credit connections", a China slowdown would "impair" the credit profiles of many companies globally, particularly commodity-dependent ones in oil and gas, steel, and mining, Fitch said.

"Shipping companies would also suffer, as commodities account for a significant portion of freight volume. The global technology, heavy manufacturing and automotive sectors would also feel increased credit pressure due to a slowdown in Chinese demand," the agency warned.

Andrew Steel, managing director of Asia-Pacific Corporates Ratings at Fitch, said commodity companies already under pressure from slowing China demand and falling prices, would be pressured further.

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"Knock-on effects like anaemic or slowing global consumer demand and commodity supply gluts would persist or worsen," Steel predicted.

Within Fitch's rated portfolio, 25 percent of oil and gas companies and 52 percent of other commodities companies are already sub-investment grade. If the slowdown scenario materialized, it could create ripple effects through the high-yield bond market, the agency said.

Robust growth, for now

China's growth rate is expected to be 6.8 percent in 2015, according to the International Monetary Fund's latest "World Economic Outlook" report published in October.

Although robust, that growth rate has been slowing down year on year, reflecting slower economic conditions in the rest of the world. In 2013, China's economy grew 7.7 percent but in 2014 China's GDP expanded by 7.3 percent. The IMF predicted further slowing growth in 2016, of 6.3 percent.

Fitch's Warlick said markets were watching China for signs of the slowdown accelerating.

"China's rapid rise as a global economic power, and its deepening ties to the rest of the world, have forced global credit investors to weigh carefully the potential impact of a sharp China slowdown," he said in the report.

"After tracing China's financial and trade links around the world, it's clear that a greater-than-expected deceleration in Chinese economic activity would have far-reaching implications for global growth, corporate credit quality and monetary policy."