Australia is tracking a Chinese surveillance ship making its way towards Queensland ahead of a joint military exercise with the United States.
Prime Minister Scott Morrison said Australia respected freedom of navigation in international waters but was "very wary" of the ship.
"They're in an area where they're allowed to be and we know they're there and we're keeping a close eye on it," he told Sydney radio 2SM on Wednesday.
When pressed, the prime minister conceded he was concerned about the ship.
"We wouldn't be watching them if we weren't," Mr Morrison said.
"Of course we watch them. We're aware of that. And they're watching us."
The Chinese electronic surveillance vessel is expected to arrive on Friday, closely monitoring Talisman Sabre war games taking place over the next fortnight.
Mr Morrison said the vessel had the same legal rights to be in the waters as Australian ships had to sail through the South China Sea.
"And so, we would just simply say that we think the same tolerances and the same appreciation of those international laws should apply."
Defence Minister Peter Dutton said the Chinese operation was a repeat of previous years, where the People's Liberation Army conducted both covert and overt activities.
Mr Dutton said China's military activities had ramped up dramatically, which was partly why the joint exercises were so important.
"Talisman Sabre is not just about the collaboration between Australia and the United States, it's about our collaboration with near neighbours," he told reporters in Queensland.
"Our militaries working together in the region is more important than it has ever been."
Australia's relationship with China has sunk to its lowest ebb in many years.
The steep diplomatic decline has been driven by several factors, including the decision to ban a Chinese company from building Australia's 5G network.
Mr Morrison was treasurer when the controversial call was made five years ago.
"National security interests will always come first in those decisions," he said.
The relationship has also been strained by China's bullish behaviour in the Indo-Pacific and attempts to exert economic pressure on Australia through a series of trade strikes.
Mr Morrison, who recently attended a major international summit, said the United Kingdom and other allies were very interested in how Australia was faring under the pressures applied by China.
"And they were very, very congratulatory about the strong stand we've taken for our sovereignty because free countries, when they stand together, are always stronger."
Australian Associated Press