FACTBOX-Five political risks to watch in Australia

SYDNEY Feb 1 (Reuters) - Australian Prime Minister Kevin Rudd begins his parliamentary year Feb. 2 and is expected to call an election around September-October. Rudd is well ahead in opinion polls and has the option of calling an early poll over his climate change policy. But with the economy performing well, speculation of an early poll has declined.

Sovereign 5-year credit default swaps for Australia AUGV5YUSAR=R are trading at a spread of around 46 basis points. The spread has risen from a recent low of 20 basis points last October but is still far below the high of 170 hit during the worst of the global financial crisis.

Following is a summary of key Australian risks to watch:

* RELATIONS WITH CHINA

Relations between China and Australia have stabilised after a period of turbulence, but bilateral ties will remain vulnerable to tensions over China's efforts to buy key stakes in Australian commodities and resources firms. Australia will have to find the appropriate balance between being open to investment and trade -- demand from China was the key factor that rescued the country from global recession -- while ensuring that deals are not contrary to national interests. The legal case in China against four Rio Tinto executives soured relations last year.

What to watch:

-- China's next move in the Rio Tinto case (RIO.L). Chinese investigators have sent the case to prosecutors. A recommendation to go to trial would strain bilateral ties. But China has already dropped the most serious charge, of stealing state secrets, which may signal it wants to defuse the politically charged case.

-- Progress on a free trade agreement with China.

-- Decisions on Chinese investment bids and China's response. There will be a negative impact on share prices for resource firms that are prevented from selling stakes to foreign buyers.

* CLIMATE CHANGE AND ENVIRONMENT

Climate change and the environment will be a key battleground in Australia's 2010 election, whenever it is held. [nSGE60D0IX]

Rudd has said he will re-introduce his twice-defeated carbon emissions trading scheme into parliament when it starts its 2010 year this month. His oponnents, who control the upper house Senate, have vowed to vote down the legislation again. Rudd already has the constitutional trigger to call a snap election after the bill was twice defeated in 2009, but failure of U.N. climate talks in Copenhagen last December may have dampened his motivation to use the complicated policy to call an early poll. [ID:nSGE5BL00I]

What to watch:

-- With the opposition still opposed to Rudd's plans, he is likely to have only two options -- snap elections, or putting climate policy on the back burner until after late 2010 polls.

-- Once the likely outline of long-term climate change policy becomes clearer, the expected impact on companies will be reflected in Australian stocks .AXJO.

* ECONOMIC POLICY

The election will be fought mainly over the economy and who is the best economic manager. Traditionally, conservative parties have claimed this mantle, but the Rudd government's ability to steer Australia through the global financial crisis and avoid recession has given it economic kudos among many voters.

With the economy growing, the housing market on the rise and jobless figures not as high as forecast in 2009, many Australians barely noticed the global downturn. [ID:nSG-E60G039]

But homeowners, particularly in crucial marginal mortgage belt electorates around Sydney, Melbourne and Brisbane, are concerned about rising interest rates.

What to watch:

-- Monetary policy. The central bank has raised rates for three successive months and is expected to hike again this week as it aims to curb inflation. [ID:nSGE60O04G]

-- Rising mortgage rates could affect Rudd's re-election hopes. Rates are currently around 6 percent, up from a record low of below 5 percent in 2009, but if home loan rates reach around 7 percent by mid-year and leveraged Australian voters start to feel the pinch, the Rudd government may feel the political backlash.

-- May national budget. Despite a budget deficit after a series of stimulus packages in 2009, Rudd may be able to find selective spending for key voters. A major tax reform report is not expected to be implemented before elections, but may allow Rudd to offer key voters tax breaks in a second term.

-- Tax policy. Speculation the government will introduce a 40 percent uniform national resource tax in place of individual state royalty taxes hit shares in the sector last month. If the plan looks likely to be implemented, expect shares like BHP Billiton (BHP.AX) BHP.L, Rio Tinto (RIO.AX) (RIO.L) and Xstrata (XTA.L) to fall due to the impact on profits. [ID:nSGE60R03A]

-- Insolvency law reform. Australia plans legislation by the third quarter of the year to overturn a court ruling that put shareholders on equal footing with unsecured creditors in the event of a corporate insolvency. Analysts say the reform will give a boost to debt prices <AU/DEBT>. [ID:nSGE60I00E]

* RUDD'S POPULARITY

Rudd has a commanding majority and current poll ratings show him on course to easily win the next election. But rising unemployment and interest rates may give some ammunition to the conservative opposition to dent Rudd's popularity.

The opposition is also likely to get a temporary boost from its election of a combative new leader, while the issue of asylum seekers has cost Rudd some popularity. [ID:nSYD475247]

But given that opposition policies are similar in most aspects, even a sudden dive in Rudd's re-election prospects would be unlikely to have a major impact on markets, analysts say.

What to watch:

-- Opinion polls. Most analysts expect the opposition to see a short-term boost in popularity after it replaced its leader, but Rudd is still firm favourite to win the next election.

-- The debate over asylum seekers. The issue has dented Rudd's popularity, and the opposition will seek to exploit this.

* SECURITY

Border security is back on the political agenda, with Rudd accused of being soft after dismantling the previous government's policy of mandatory detention. Rudd says conflicts in South Asia are the reason for the rise in boatpeople numbers, but the controversy is a potential vulnerability for him -- conservative parties won a 2001 election on the issue.

Rudd has been a far less vocal backer of the global war on terrorism than his predecessor, and pulled Australian troops out of Iraq. Nevertheless, Australia is seen as a key U.S. ally and faces the possibility of attacks on its soil by militant groups.

What to watch:

-- The opposition will try to use border security to undermine Rudd's support. If popular opinion turns against his handling of the issue, his re-election bid will suffer.

-- Any change to Australia's terrorism alert level, which has been at medium since 2003. But analysts say that even if Australia is targeted in a militant attack, the impact on markets would be very limited.

(Compiled by Sydney bureau and Andrew Marshall)