Federal Treasury has warned that industrial overcapacity and high debt levels could hamper China's transition to a more consumption and services- oriented economy.
As Treasury notes in the latest budget papers, the Chinese economy is in the process of transitioning to "a more balanced growth model". 
Unlike the pattern of the past few decades, China's "growth will increasingly be driven by consumption and services, and be less reliant on investment".
Indeed, this process is already well under way. Since 2011, growth in consumer spending has outstripped China's overall GDP growth and the country's service sectors now contribute more than 50 per cent of GDP.
But this rebalancing poses challenges for Australia. Treasury acknowledges that slowing investment growth in China has resulted in softer demand for Australia's bulk commodity exports, such as coal and iron ore, which has in turn translated into lower prices. While commodity prices have picked up in the past few months, Treasury notes that they "remain well below recent peaks".
Treasury is relatively pessimistic about the outlook for commodity prices. "Increases in supply and lower demand, particularly from China, will continue to place downward pressure on prices," it says.
At the same time, Treasury is also keen to point out that China's rebalancing also creates significant opportunities.
"Demand for Australian goods and services is expected to benefit from China's rising middle class, which according to some estimates is expected to grow to more than 850 million people by 2030."
Already some of Australia's services sectors are benefitting from stronger Chinese demand, so much so that China is now Australia's largest service export destination. China is also our second-largest source of overseas visitors. The number of tourists from China in 2015 is expected to exceed 1 million for the first time.
Treasury is hopeful that the China-Australia Free Trade Agreement will further open the Chinese market to Australian companies by removing or reducing market access barriers in a range of sectors, including health, financial and legal services.
However, although China's rebalancing is expected to result in more sustainable growth over the longer term, there is a risk that growth could slow abruptly. As Treasury notes, "In the near to medium term, increasing consumption and rising service sectors are unlikely to fully offset the decline in investment and a slowing industrial sector."
In addition, the Chinese economy is also saddled with industrial overcapacity and high debt levels. Treasury notes that effectively managing these risks will be important in ensuring a smooth rebalancing of the economy.
But Australia isn't the only country worried that the Chinese economy may not proceed smoothly. Treasury notes that China is one of the main trading partners for more than 100 economies, which account for about 80 per cent of world GDP and a larger than expected slowdown in China's economy would have a significant impact globally.