Fairfax Media reported on Tuesday that China had approached Vanuatu about building its military presence in the country, with the ultimate ambition being a full military base. China has just one overseas military base already, in Djibouti in Africa.

Vanuatu has already received development funding from China, including a new wharf on the north island of Espiritu Santo and a commitment to fund a new prime ministerial residence.

"The lights will burn bright in Russell tonight as a result of this," senior analyst at the Australian Strategic Policy Institute Malcolm Davis said.

A Chinese military base in Vanuatu would be just 2000 kilometres from Australia, and would also send a message to the United States on Beijing's plans for the region.

It would have significant implications for Australia's defence capabilities and strategy if a military base were to be built, experts say, although they say the plans are likely to be incremental. Australia must keep a close eye on what is developed in Vanuatu and consider if current military structures are suited to responding to the challenge, Dr Davis said.

"It’s going to require us to fundamentally do some hard thinking about our strategic environment, how that changes our strategy, how it changes our force structure, and our force posture as well," Dr Davis said.

"[A future military base] does fundamentally change our strategic circumstances in a very negative way," Dr Davis said. The landscape would be significantly different to that experienced during the Cold War, where Australia was "pretty much in a strategic backwater", he said.

"Now with this and with other developments we are very much a frontline state. So our strategic circumstances are changing rapidly and that could demand that we do some sort of strategic update or strategic review following on from the 2016 White Paper just to make sure that our policy is up to date and syncing with the strategic outlook," Dr Davis said.

Academic director at Australian National University's National Security College Matthew Sussex said that while it wasn't surprising that China would have an interest in Vanuatu, the threat shouldn't be overstated.

"First of all it’s not going to be a major base to deploy large amounts of troops and it will be sitting out like a shag on a rock a long, long way away from where China deems areas of strategic significance. But it does point to the fact that the Chinese are keen to engage in that sort of maritime domain in what America regards as its own backyard," Dr Sussex said.

While Vanuatu's Foreign Minister has denied that the talks between the two nations have taken place, Australia would need to make significant diplomatic efforts to counter the Chinese expansion.

"It's in many respects a series of tests for Australian diplomacy and how well it is able to keep countries like Vanuatu, who see Australia as sort of a framework provider of assistance and security in the region, just how tight that is," Dr Sussex said.

Decreases in Australian aid funding to the Pacific have also played a role.

"Australia has for various reasons, kind of downgraded its position as a leading aid giver - I mean it still is a leading aid giver - but it’s certainly downgraded that and that has flow on effects. So if you have countries that are used to receiving both investment and aid then it’s not surprising that they would turn to other places," Dr Sussex said.

Professor Clive Hamilton, who has recently written a book on Chinese influence in Australia, said that China had been able to establish its presence in the Pacific because the region had been neglected by Australia.

"We're about to cut back on our aid budget once again so each time we cut our aid budget we create a larger gap for China to step in. So I think that it really is of strategic importance for Australia to make it clear to the Pacific island nations that you remain in our backyard and we are committed to looking after your interests," he said.

According to Professor Hamilton, China wants to break Australia away from its alliance with the United States, but a base in the Pacific would actually make Australia more reluctant to threaten that alliance.

"We are not positioned in a way to fully understand and counter this kind of threat because we've never faced it before. We’re not in a war situation or anything near it and yet we have a new aggressive hegemonic power in the region that wants to muscle in and we are in a difficult situation because that would normally call on us having a much closer relationship with the United States but that's a nation that currently going through the trauma of an erratic and dangerous president so we have to try and see beyond that and re-establish our links with democratic nations," Professor Hamilton said.