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Will China's slowdown benefit the rest of the world?

Margareta Lindeman | Flickr | Getty Images

Worries over China's slowing economy have been a recurring headwind for investors in recent years, but a note from U.K. research firm Capital Economics argues that slower growth will in fact be positive for the rest of the world.

"China's continuing economic slowdown is clearly bad news for some commodity exporters. However, the world as a whole should actually benefit from slower but better-balanced growth in China," the note said.

(Read more: Smog—the economic kind—swallows China)

Concerns over the state of China's economy and risks of a credit bubble have come back into focus recently following the country's first bond default in recent history, combined with a string of negative economic data. Meanwhile, Chinese Premier Li Keqiang warned on Thursday that the economy faces "severe challenges" in 2014, rattling sentiment and prompting a sharp sell-off on the Chinese stock market.

If the world's second-largest economy was to suddenly slow, or if its credit problems were to lead to an economic crash, many fear the global ramifications would be severe.

Frederic Neumann, co-head of Asian economic research at HSBC, said a sudden stumble by China would reverberate across the world.

"While weaker commodity prices would ultimately provide a boost to the West, there is a tail of countries from Australia to Africa and Latin America, depending on the sector, [therefore] a sudden crunch on the Mainland would thus have a knock-on effect elsewhere," he added.

But Capital Economics' chief global economist Julian Jessop said slower Chinese growth would be better for the global market for five reasons.

Firstly, slowing growth in China is no new phenomenon. In fact, growth has been slowing sharply since 2011, he pointed out, thus recent signs of a slowdown are just a continuation of an ongoing trend.

(Read more: What that China debt default means to the market)

Secondly, because China's economy has grown so large following years of double-digit growth, increases in demand at growth rates of 7 percent are potentially just as big as those in the 2000s, Jessop said. A shift away from net exports towards consumption could in principle boost activity elsewhere, by reducing China's trade surplus, he added.

The third reason cited Jessop pointed out was that Chinese authorities have engineered slowing growth, and if growth were to suddenly worsen, they would have the means to change their policies.

"A controlled slowdown now should reduce the chances of a crash landing later," he added.

Fourthly, although many analysts fear a China slowdown would be negative for commodity prices, Jessop said it would actually be a net positive for the rest of the world.

"Obviously it is bad news for commodity producers and exporters, at least initially, but even they would eventually be worse off if China's unsustainable investment and credit boom were allowed to continue. In the meantime, it is good news for commodity consumers, including China itself," he said.

Finally, Capital Economics warned investors to be wary of reading too much into the recent rout in copper prices. They said the slump has been compounded by factors specific to the industry, such as China's clampdown on the use of metals for financing.

Capital Economics' view echoes that of Marc Faber, the editor and publisher of The Gloom, Boom and Doom Report, who told CNBC on Thursday that China was growing at a much slower pace than people commonly perceived. He said this was ultimately not as worrying as many thought however, because slower growth with less credit risk would be better for China long term.

(Read more: China central bank ready to act if growth falters)

"While China will likely avoid a hard-landing, it's important not to be complacent about the importance of mainland growth for the world economy as a whole," added HSBC's Neumann.

"The world can probably deal with a gradual deceleration of Chinese growth, but a stumble would trip everyone else up as well," he added.

China enjoyed double digit growth prior to the global financial crisis, but has slowed down considerably since. Growth dropped to 7.7 percent in 2012 and 2013, down from 9.2 percent in 2011. Capital Economics sees China growing by 7.3 percent in 2014 and 7 percent in 2015, below the Chinese government's 2014 forecast for 7.5 percent.

By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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