GOLDMAN SACHS: Don't worry about China

Financial markets have not enjoyed the best of starts to 2016.

While the markets are fretting, with some well-known investors making some increasingly bearish calls, not everyone believes that a "China-geddon"-type scenario will unfold in the period ahead, leading to a worldwide recession.

Goldman Sachs, for one, isn't pessimistic. Far from it.

Not only does the famed investment bank believe that a continued slowdown in China will have little impact on global growth, but it suggests that an even steeper decline will matter little to the global economy in the year ahead.

Here's the view of Jari Stehn, Goldman's senior global economist, on why the risks to developed nations from an accelerated China slowdown are "probably not very big":

The main reason is that exports to China, and more broadly to Asia ex-Japan, as a share of GDP are small—around 1%—for most DM countries with the exceptions of Australia, Japan, and Germany. This means that even if Chinese import volumes were to decline by 10% across the board due to a combination of Chinese domestic demand weakness and CNY depreciation—a very severe assumption—this would only take 0.1ppt off DM GDP growth directly.

Based on analysis conducted by Goldman involving the renminbi and Chinese-financial conditions in the year ahead, Stehn suggests that under even the most adverse scenario for the Chinese economy — a drop of 2 percentage points in domestic demand, no change in the value of the renminbi, and a significant tightening in financial conditions — the "spillovers into developed market economies appear manageable".

As for the recent turmoil that has gripped financial markets — largely centered around the outlook for the Chinese economy, hence global growth — Stehn suggests that the sell-off in US stocks may "overstate the headwinds facing the real economy".

While Stehn isn't convinced that a recent sell-off in risk assets points to a sharp slowdown in growth in the period ahead, he cautioned that concerns in financial markets could, if sustained, end up affecting the real economy, something that US Federal Reserve Chair Janet Yellen said overnight.

"The markets can create their own reality, at least up to a point, via the sharp tightening in financial conditions, so it is important to watch this indicator closely," says Stehn.

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