China’s ambassador to Australia told a business forum in Canberra a "Cold War" mentality was holding back trade.
The Prime Minister has moved to quell tensions with Beijing after the Chinese Ambassador strongly defended his country's actions in the region.
"From time to time there will be differences, in terms of issues, but the important thing is we deal with them as friends with respect," Mr Turnbull told an audience at a China-Australia networking event in Parliament on Tuesday.
"Mutual respect is the absolute key."
But, in a clear signal to China and escalating fears of a trade war with the United States, the Foreign Minister said all countries in the region must "play by the rules".
"No two countries agree on every single aspect of foreign policies," Julie Bishop told the same event.
"We're working closely with China on the international economic order. If you've got a trade dispute and you can't resolve it amicably,go to the World Trade Organisation."
Chinese ambassador Cheng Jingye has rejected as “absurd” accusations that his home country is making strategic use of development loans to Pacific countries to trap them in so-called ‘debt bondage’.
The rejection comes after Australia’s foreign minister Julie Bishop warned unsustainable loans could put the sovereignty of small Pacific states at risk and expressed Australia’s desire to compete as the “natural partner of choice” for its regional neighbours.
Turnbull government ministers have previously accused China of building “roads to nowhere” and “useless buildings” in the Pacific.
Mr Cheng was at Parliament House on Tuesday to deliver a keynote speech at a business forum organised by the Australia China Business Council.
“We have a growing economic cooperation with some of the island countries,” Mr Jingye told reporters outside the event.
“They are on equal footing and I think it's mutually beneficial.”
“I think that is absurd, how did you get that impression?” the ambassador asked one reporter. “Maybe you need to get more into the facts.”
Earlier, in his official address to the gathered business forum, Mr Cheng said China “never interferes in the internal affairs” of other countries and said there needed to be less “Cold War mentality”.
SBS News asked the ambassador to clarify the remark, and whether he thought members of the Turnbull government thought that way.
“The Cold War is over but still some people's mindset is still there,” he said.
Opposition leader Bill Shorten said the government had allowed a “vacuum” to develop in the Pacific by winding back aid over the past five years.
“Do I blame Pacific islands for reaching out to each other when Australia has vacated the field? No,” the Labor leader said.
“The answer here is not to reignite Cold War rhetoric.”
“Treat the nations of the Pacific not as big brother, but certainly as family. And we need to extend a lot more aid, interest and support into the Pacific.”
John Brumby, who chairs the Australia China Business Council, said while the trade relationship between the two countries remained strong, the recent tension between governments had the “potential to undermine” business opportunities.
“To put it bluntly, the relationship needs reset and repair,” Mr Brumby said.