PricewaterhouseCoopers chief economist Jeremy Thorpe, who wrote the report, said the likelihood of a hard landing would be exacerbated if the triggers were released simultaneously. "Internal and external risks are already aligning, with the trade war slowing Chinese economic growth and putting pressure on smaller Chinese banks’ loan portfolios," he said. In May, Baoshang Bank was the first Chinese bank to fail in 20 years. Two others needed government intervention. Reserve Bank of Australia governor Philip Lowe warned last year that "the single biggest risk to the Chinese economy lies in the financial sector and the big run-up in debt there over the past decade".

Deloitte modelling found the impact for Australia of a hard landing would be 7 per cent of our national income, amounting to $140 billion as international demand slows. Other scenarios modelled by the Asian Development Bank estimated that a 1 percentage point drop in China's growth rate would cause economic growth in Australia to fall by about 0.05 percentage points. Mr Thorpe said lower demand for natural resources would cascade into lower commodity prices and undermine the projected budget surplus. Some of that impact could be offset by greater stimulus spending on construction by the Chinese government, he said, with a subsequent increase in demand for iron ore and coal in particular. Mr Thorpe said universities could also benefit from Chinese students choosing Australian courses over more expensive options in the US and Britain.

Loading Replay Replay video Play video Play video "As long as [China's] government does not seek to rein in its students studying abroad, we may see Australia attract a new cohort of price-sensitive Chinese students shifting from higher-cost markets or coming to Australia as the cost of education falls," he said. Peter Costello, a former treasurer and current chairman of Nine, owner of The Age and The Sydney Morning Herald, said it wasn't just the US-China relationship under pressure, arguing the Australia-China relationship was "very strained at the moment". “It’s been strained by a number of issues and that has made investment between Australia and China much more difficult, and it puts a lot of obstacles in the way," he said. “That has already had its effect on Australia, and what would be even worse would be if all of this [US-China] trade tension leads to a downturn in the Chinese economy."

S&P Global chief economist Paul Gruenwald, in Australia on a public speaking tour, said the direct economic impact of the US-China trade war on both countries was about a quarter of a percentage point in lower growth. Loading But it was the uncertainty around the trade war that was weighing on markets and potentially the global economy. "It's a classic case of uncertainty versus risk," he said. "If we get rid of the uncertainty then it all comes down to risk, and businesses can measure and account for risk." Mr Gruenwald said uncertainty was growing because it was increasingly difficult to determine the final outcome of the trade battle.

"Commodities demand is strong and will remain that way while education and tourism links to China also mean Australia is protected from the US-China tension," he said. Mr Thorpe said the government should secure more free-trade agreements as a matter of urgency to "enhance flexibility for exporters". He said protecting the $7.1 billion surplus should not come at the cost of economic growth. The national accounts are forecast to deliver a paltry 0.3 per cent growth rate for the three months to the end of June when they are released next week after weaker than expected construction data was revealed on Wednesday. "[The government should] be prepared to sacrifice projections of the budget returning to surplus given likely tax revenue shocks and the need to increase spending to stimulate the economy," Mr Thorpe said.