Twice this week China’s stock market regulators have suspended trading on the Shanghai stock exchange after Chinese stocks plunged by more than 7% – in one case in just 29 minutes of trading.

That could have follow-on implications for Australia’s property market. A factor known as the wealth effect means consumers feel less confident when prices are falling, and adjust their spending patterns accordingly.

Chinese investors are reportedly dominating sales of brand new apartments in Australia’s capital cities, causing a construction boom, particularly in Melbourne and Sydney. If those same investors are losing money on China’s stock exchanges, we could see a massive decline in investment in Australian property.

A boom in Chinese tourists to Australia has also helped our economy at a time when our three largest export earners, iron ore, coal and gas face ultra-low prices. That is mainly thanks to our low Australian dollar – which slipped below US 70 cents overnight. But China’s currency was recently devalued as well, which could impact on tourism to Australia.

Chinese property investors and tourism have both helped to prop up our economy as we transition away from resources-based growth, and as mining investment slows.

Australia would likely already be in a recession if not for those factors above, but our ties to China make our economy increasingly dependent on Chinese investment and Chinese tourism. Should those be negatively affected, Australia’s economy could be hard hit – particularly our property market.

That could also have flow on effects to other parts of our economy – including our big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), which are heavily exposed to the residential property sector.

The other concern is that moves to limit property investor credit growth by lenders could see a large proportion of property buyers (both Australian and Chinese) exit the housing market.

House prices could fall dramatically from here, and are already heading backwards in some capital cities.

Foolish takeaway

We shouldn’t underestimate the impact China has on Australia in many different areas, and the risks appear to be more negative than positive.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.