MELBOURNE: China accused Australia of hysteria and paranoia on Wednesday after Prime Minister Malcolm Turnbull vowed to ban foreign political donations in a move to curb external influence on its domestic politics.

Foreign powers were making "unprecedented and increasingly sophisticated attempts to influence the political process" in Australia and the world, Turnbull told reporters in Canberra on Tuesday. He had cited "disturbing reports about Chinese influence".

The announcement came as concern grows that Beijing may be extending its soft power efforts in the country and as relationships between Australian politicians and Chinese government interests become increasingly contentious.

"Some Australian media have repeatedly fabricated news stories about the so-called Chinese influence and infiltration in Australia," the Chinese Embassy in Australia said in an English-language statement on its website.

"Those reports, which were made up out of thin air and filled with cold war mentality and ideological bias, reflected a typical anti-China hysteria and paranoid (sic)."

The statement said that "irresponsible remarks" by some Australian politicians and government officials had damaged trust between the countries and that it categorically rejected all allegations.

China's soft power has come under renewed focus this week after a politician from Australia's opposition Labor party was demoted from government having been found to have warned a prominent Chinese business leader and Communist Party member that his phone was being tapped by intelligence authorities.

In June, Fairfax Media and the Australian Broadcasting Corporation reported on a concerted campaign by China to "infiltrate" Australian politics to promote Chinese interests.

Australia and neighbouring New Zealand are among roughly a third of countries worldwide that allow foreign donations to political parties. Such donations are prohibited in the United States, Britain and several European countries.

The new laws, modelled in part on the US Foreign Agents Registration Act, would criminalise foreign interference and require the registration of lobbyists working for nation states, Turnbull said.

"China has no intention to interfere in Australia's internal affairs or exert influence on its political process through political donations," the embassy said.

"We urge the Australian side to look at China and China-Australia relations in an objective, fair and rational manner."