China's economic slowdown is feared to have a significant negative impact on the South Korean economy that is highly dependent on the neighboring country for its exports, a leading state think tank said Monday.

In a report on the world's second-largest economy, the Korea Development Institute said that Beijing may seek to reduce overinvestment and excess production capacity, bringing the country into a deep economic funk.

"China is moving to adjust excessive investments that have accumulated since the 2008 global financial crisis, which could plunge the economy into a hard landing and have a chilling effect on South Korea," the report said.

A possible 1 percentage point drop in China's economic growth will drag down South Korea's growth by up to 0.6 percentage point, regarding the fact that China is South Korea's largest trade partner with $235.4 billion in trade volume in 2014, followed by the United States with $115.6 billion, it said.

The KDI report explained that a slowing Chinese economy will weigh heavily on the recovery of the emerging markets and advanced countries, which may also pare an additional 0.2 to 0.4 percentage point off South Korea's economic growth.

China's economic hard landing is feared to damage South Korea's aviation, electric equipment, electronics, chemicals and machinery sectors, it forecast.

If the Beijing government pushes for a massive overhaul of industries plagued by excess capacity, it will have a more serious impact upon South Korea's export companies, it said.

The KDI report called for measures to cushion the fallout of a potential Chinese industrial reform.

"South Korea should deal with such an unexpected impact by maintaining a flexible foreign exchange system and timely implementing fiscal and monetary policies," the report said. "Steps should also be taken to weed out indebted companies and tackle the issue of mounting household debt to improve the health of the financial industry." (Yonhap)