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Australia is 'economic envy of world'

Australia is positioned enviably in the global economy but growing ties to China also expose it to risks, a US-based economist says.

Vanguard Investments' chief economist, Joe Davis, told a business function in Sydney on Thursday that Australia had proved one of the most resilient developed economies through the global financial crisis.

Its diversification had been a significant factor in its success, Mr Davis said.

"In the near term, it seems to me Australia is very well served by its exposure to the United States and developed markets and increasingly markets in Asia," Mr Davis said.

"I think it's actually a very enviable position, quite frankly. Many countries would die to have that sort of full and diversified exposure."

But the growing relationship with China carried with it risks that might be overlooked.

"The trade off is being exposed to the frothiness which is clearly understated," Mr Davis said.

"It's a growth story, but if there's a risk in China in the next three to five years (that) I think many people don't talk about, it's the risk of China repeating the mistakes that we observed in the seventies of (being) reluctant to rein in inflation because the fear is it will knock down growth.

"Clearly, the fears of knocking down growth in China are profound. It's not a likely outcome but it's a risk there."

Mr Davis forecasts long, slow recovery from the global financial crisis, but said investors still could earn good returns if they stick to long-held investment principles, such as patience and diversification.

Vanguard Investments manages over $1.4 trillion in assets around the world.

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