The Federal Government has been warned over the increasing economic dependency on China.

 

Treasury has published a working paper warning that rising inflation is one of the many threats to economic stability in the country. The paper warns that in the event of an economic contraction in China, Australia would face severe economic and trade reactions.

 

"The short-term one is the one that everyone talks about which is about rising inflation, the fact that China's keeping this undervalued exchange rate and that they've got over-stimulatory policy because of that, so they may have to tighten by more and cause the economy to slow," The chief investment strategist at Russell Investments Andrew Pease has told the ABC.

 

"But there's a longer-term issue in that the Chinese economy is very unbalanced because they've been building up a lot more debt than the official numbers show, and they're running very, very high investment levels."

 

"Quite often when the Australian economy hits a downturn we have this wonderful stabilising impact of the exchange rate falling, which trends to insulate our economy from the rest of the world," he explained.

 

"But given how closely we are linked to China we may actually experience a much deeper downturn if China does actually go south."

 

The warnings by Treasury come as the value of trade with China to the Australian economy topped $100 billion in late June.

 

The full paper can be downloaded from the Treasury website here