Australia fears $3 billion hit from China slowdown

Australia warned Monday that the "softness" of China's economy and tumbling iron ore prices could leave a multibillion-dollar hole in the nation's budget.

Troubles in China's massive construction sector have seen iron ore prices drop about 30 percent since the start of the year -- and the ripple effects are now being felt Down Under.

Australia is the world's largest producer of iron ore, the main raw component for making steel used in building homes, railways and other infrastructure.

Treasurer Jim Chalmers warned the "softness in the Chinese economy" and sinking iron ore prices were reminders that Australia was "not immune from volatility and uncertainty in the global economy".

His department now believes that the faster-than-expected fall could reduce tax receipts by around Aus$3 billion (US$2 billion) over the next three to four years.

The metal accounted for 18 percent of Australia's total exports last year.

The lucrative trade with a rapidly growing China has bolstered Australian mining profits and Canberra's tax coffers for decades.

But after months of worry about China's ailing real estate sector and excess manufacturing capacity, the price of iron ore sank by more than seven percent in the past week alone.

China posted weaker-than-expected growth in the June quarter.

The world's largest steelmaker China's Baowu Steel Group warned that the sector's troubles could be longer and more severe than expected.

Australian mining firms have already taken a hit, with shares in Rio Tinto and BHP -- two of the world's biggest producers -- down roughly 20 percent since the start of the year.

Reserve Bank of Australia governor Michele Bullock told parliament last week that given the country's dependence on China, she was watching the situation closely.

"Developments in China can have quite a big impact on the way our trade develops, and therefore on our growth," she said.

"It's our biggest trading partner, and it's very important in particular for the prices of the commodities that we export, in particular iron ore."