The remarks are a reminder that China remains an opportunity and risk for Australia's economy, which Dr Kent said was continuing to shift towards non-mining drivers of growth. There is a growing focus across global markets on debt levels in China, which Dr Kent noted comes mostly from inside China.

Since the global financial crisis, which triggered a surge in stimulus measures that have helped Australia's commodity exporters weather the global recession, China's total public and private debt has ballooned to about 250 per cent of gross domestic product.

"This is still below that of several advanced economies, but it stands out among emerging market economies given China's relatively modest stage of economic development," he said.

Dr Kent said one specific concern is that some of China's smaller lenders have large exposures to regions and sectors that are suffering economic hardship.

Shadow banking

"Likewise, institutions involved in complex 'shadow banking' transactions could experience problems if a shift of sentiment in funding markets forces these types of activities to be unwound."

The main risk to Australia from China's uncertain outlook is likely to be any fallout on commodity prices and the exports of goods and services, he said.

"A depreciation of the Australian dollar in response to negative developments in external conditions could be expected to act as a buffer in the way that it has in the past," he said in reference to the $A falling to less than US50¢ after the Asian financial crisis in the late 1990s.


Dr Kent warned that the pattern of policy makers in China relying increasingly on loose monetary policy and fiscal stimulus to sustain economic growth may be delaying much needed "supply-side reforms".

"To the extent that this represents a re-prioritisation of short-term objectives over longer-term sustainability, it may increase the likelihood of a future disruptive adjustment."

He says China's pattern of growth, heavily driven by industrial investment and property, has "given rise to significant imbalances".

"High and rising levels of corporate debt in the face of excess capacity and declining profitability suggests a greater risk of corporate defaults, which could ultimately lead to disruption in the financial system," he said.

The Australian Bureau of Statistics reported on Thursday that the local economy added 17,900 extra jobs last month, roughly matching economists' forecasts.