Treasurer Josh Frydenberg says Australia will continue speaking out against China in the interests of national security, while acknowledging the importance of the trade relationship.
It comes as China has called certain Australian politicians troublemakers and urged them to "shake off the Cold War mentality" amid fierce tensions between the two nations.
Mr Frydenberg says Australia is focused on securing peace in the Indo-Pacific region.
"Australia is a great beneficiary of peace," he told the ABC on Thursday.
"At the same time we want our national defence force to be well resourced and as capable as possible.
"The relationship with China is important, they're our largest trading partner. But with respect to our national interest we'll always continue to prosecute the case, whether that's foreign investment, whether that's human rights or other national security issues."
Home Affairs secretary Mike Pezzullo recently declared the world's "drums of war" were beating and Australia must prepare for conflict in the region.
Chinese Foreign Ministry spokesman Zhao Lijian gave a pointed response when asked about the remarks.
"Some individual politicians in Australia, out of their selfish interests, are keen to make statements that incite confrontation and hype up threat of war, which is extremely irresponsible," he said at a news conference on Wednesday.
"These people are the real troublemakers."
Mr Zhao said Australia had benefited from co-operation with China for a long time.
"Australia is being untruthful and immoral with its false allegation of a 'China threat theory'. This will only end up hurting its own interests," he said.
"We urge certain individuals in Australia to shake off the Cold War mentality, stop making irresponsible remarks, and act in ways that are conducive to regional peace and stability rather than the opposite."
Labor home affairs spokeswoman Kristina Keneally said ministers, not bureaucrats, should be leading the conversation with Australians on foreign affairs issues.
"There is no scenario in which China doesn't matter," she told Sky News on Thursday.
"Our relationship with China has grown more difficult over recent years we want a productive relationship with China - one where Australian values are understood and respected - and that is up to the elected officials to lead that engagement."
The relationship between the two nations has crumbled recently, in part sparked by Australia's early call for an inquiry into the origins of COVID-19.
China bristled and later slapped damaging tariffs on Australian barley and wine, while trade disruptions to other produce followed. Tensions have heightened since.
Senator Keneally said the government had let Australia grow more reliant on China in terms of trade.
"It is now up to the government to do the important work of diversifying our trade relationship."
