The story of how Australia’s economic fortunes are tied to China is not new. But the extent and nature of that leverage is so significant that it should now be regarded, in the wording of properly audited accounts, as a contingent liability on the Australian national balance sheet.

If China’s voracious demand for natural resources remains strong, the sun stays out on our economic fortunes. But if China’s direction deviates even slightly — for motivations that could be political, diplomatic, military or social, not just economic — the consequences for Australia could be devastating.

Through its demand for raw materials to fuel unprecedented growth, China carries an “inflection point” influence on Australia. Not only, obviously, through an direct reduction in demand for our resources, but because of its huge impact on short-term global commodity prices, not to mention the potential consequences of its unpredictable one-party political system or its growing geo-political aspirations.

Australia’s exports to China in 2009 were $42 billion, up from about $10 billion in 2004. While a gradual slowdown in China would not be a big problem for us, Australia is vulnerable to any kind of bigger jolt — like a Chinese slowdown triggering a sharp drop in our house prices (maybe by reducing construction costs).

Let’s hope China doesn’t blink, because if it does it could be a blink that shatters Australian living standards.