The possibility of "something going wrong in China" is among the biggest economic risks faced by Australia, Reserve Bank of Australia Governor Philip Lowe said, citing the build-up of debt in the world's second largest economy.
China is now Australia's largest trading partner, accounting for nearly a third of all exports, according to official data. Australia also enjoys a steady stream of tourists and students from the mainland, providing a significant boost to its economy.
"A stable and robust financial system in China is clearly in Australia's interest," Dr Lowe said in prepared remarks for a speech in Sydney titled "Australia's deepening economic relationship with China: opportunities and risks".
"Perhaps the single biggest risk to the Chinese economy at the moment lies in the financial sector and the big run-up in debt there over the past decade."
China is a major foreign investor in the Australian economy, snapping up transport infrastructure and commercial properties, which means a sharp slowdown there could impede growth in Australia's A$1.8 trillion economy.
Dr Lowe said outstanding debt in China relative to the size of the economy is now "unusually high" by emerging market standards and greater than in many advanced economies.
"The experience is that the build-up of financial risks like those seen in China is almost always followed by a marked slowdown in GDP growth or a financial crisis," Dr Lowe said, adding such an outcome was not inevitable.
Recent measures by Chinese authorities and their willingness to tolerate slower economic growth provide a "strong signal" they are serious about addressing the vulnerabilities in the country's financial system, Lowe said.
Indeed, the RBA has devoted considerable resources to understanding China and its economy, Dr Lowe added.
"We have more staff looking at China than any other single overseas economy," he said.
"This reflects not just the importance of the Chinese economy to us but also the fact that Australia and China have different political systems, different governance arrangements and different financial systems."
The RBA also now holds 5 percent of its foreign currency reserves in yuan, he added.