A hard landing in China could spark a recession in Australia this year, but aggressive rate cuts by the Reserve Bank of Australia and falls in the currency would drive a swift recovery, Oxford Economics says. 
Fears of a sharp slowdown in China's economy are overblown, say most investors, including Aviva's Euan Munro, but the risks cannot be discounted given Australia's reliance on the world's second-biggest economy, Oxford Economic's senior Asia economist, Sian Fenner, said.
"China now accounts for around a third of Australia's merchandise exports and was responsible for an astounding 80 per cent of export growth between 2008 and 2014," Ms Fenner said.
Oxford Economics' own forecast is for Chinese growth to slow gradually over five years. But in a hard landing scenario, labelled "unavoidable" by billionaire George Soros last month, and a theme attracting hedge fund investors, China's gross domestic product growth would slow to as little as 2.9 per cent this year.
The official figures for 2015 showed growth was 6.9 per cent, its slowest pace in 25 years.
This collapse would slash the price of Australia's key commodity iron ore by almost half $US23 a tonne, Ms Fenner said.
Australia was particularly vulnerable because it was doubly exposed to weakening regional trade flows, hitting both export volumes and prices.
Ms Fenner said this would send the terms of trade falling, and blow out the fiscal deficit to a record-high 4.5 per cent or higher of GDP by 2017.
The gloomy view also forecasts the All Ordinaries index to shed another 15 per cent, or 850 points.
"As recent episodes have shown, fears of a global economic slowdown with China at its epicentre, have led to rising volatility and [have] caused investors to reduce their overall equity exposure," Ms Fenner said.
Investors in Australian shares view the local sharemarket's fortunes as tied to China, she said.
"CNY [yuan] weakening and fears of further depreciation at the start of 2016 have been key factors behind the slump in Australian stockmarkets so far this year, down around 10 per cent year-to-date."
Helping offset some of this weakness would be a fall in the Australian dollar to US61Â¢ or lower on the weak iron ore price.