In its latest publication, published on Thursday, the central bank identified three notable vulnerabilities to Australia’s financial stability – the fragile state of China’s financial system, overly optimistic investment markets leading to low risk premiums, and operational vulnerabilities arising from growing complexity and interconnectedness.

“Long-standing vulnerabilities in parts of China’s financial system — banks, non-bank institutions and local governments — have been exacerbated by continued weakness in China’s real estate sector,” the central bank said.

“Further loss of confidence – in the absence of a timely and meaningful response from the Chinese authorities – could lead to stress spillovers to the rest of China’s economy and financial system, likely to affect Australia and the rest of the world through trade and avoidance of risk channels.”

With nearly a third of China's GDP linked to its real estate market, the implications of the downturn are significant.

The RBA noted that new house price growth had fallen to its lowest level in nearly a decade, despite various policy interventions aimed at stabilizing the market, while construction activity remained subdued.

The central bank also warned of China's banking sector's significant exposure to the property market, highlighting a decline in asset quality. Although non-performing loan (NPL) ratios are reportedly stable, there are concerns that they may be insufficient. In addition, the share of loans overdue for more than one year categorized as "loss" increased in all categories of banks.

Adding to the tension, the RBA pointed out that the People's Bank of China (PBC) had raised concerns about significant long-term bonds held by non-banks, including the wealth management sector, underscoring the need for financial institutions to effectively monitor interest rate risk amid persistently low interest rates.

Australia is not immune to these risks, the RBA said, stressing that multiple stresses in China's financial system could reverberate through the global financial system.

The main channels for the transmission of financial stress, the central bank said, would include increased risk aversion, a sharp slowdown in global economic activity, falling global commodity prices and reduced Chinese demand for Australian goods and services.

Ben Woody, lead economist at Oxford Economics, agreed and highlighted Australia's dependence on China and the continued challenges China would face under a Trump presidency, warning that any impact on China would flow "quite directly" to Australia.

Although Trump has announced a 10 percent tariff on all imports, he wants a 60 percent tariff on those from China, which economists agree would be devastating to the Chinese economy.

"The main impact on Australia will be weaker global trade and demand, as well as weaker demand for Australian exports," Woody said. He added that unfortunately Australia is not currently prepared to take advantage of the opportunity to capture some of that market share from China, which is likely to disappear.

A May report from the Organization for Economic Co-operation and Development (OECD) highlighted that Australia would be one of the worst-hit economies, predicting a 1.2 per cent fall in GDP if trade between the OECD and major non-OECD countries such as China and India should have decreased by 10 percent. This would position Australia as the second most affected nation after South Korea.

Amid those concerns, Treasurer Jim Chalmers traveled to Beijing for a two-day visit this week, the first by an Australian treasurer since 2017. this way. On his return, the treasurer said he stressed to China "how much we value the proper functioning of the global rules-based market".

"I believe it is in the interest of all these markets to function properly," he said.

The treasurer also said he consulted with BHP, Rio Tinto, Fortescue and Woodside before going to China to understand "the implications for our exports of a softer Chinese economy".

Acknowledging that the Australia-China relationship is “full of complexity and opportunity”, the treasurer added: “Dialogue and engagement give us the best chance to properly manage and maximize these important relationships.

"Our approach to China is to cooperate where we can, disagree where we must and commit to Australia's national interest."