China on Thursday said Australia's sudden scrapping of a Belt and Road Initiative deal risked "serious harm" to relations and warned of retaliatory actions, but Canberra insisted it would not be bullied.

The federal government pulled the deal with Victoria state late Wednesday in a move justified by the defence minister as necessary to prevent Australia hosting a giant infrastructure scheme "used for propaganda".

Australia overruled the state's decision to join the Belt and Road Initiative (BRI) -- the flagship of President Xi Jinping's geostrategic vision for the Asia-Pacific region -- by saying the agreement was inconsistent with Australia's foreign policy.

As relations nosedive -- following spats over the origins of the coronavirus and Canberra's blocking of Chinese telecoms giant Huawei -- Defence Minister Peter Dutton said Canberra was "worried" about local governments entering into such agreements with Beijing.

"We can't allow these sort of compacts... to pop up because they're used for propaganda reasons and we're just not going to allow that to happen," he told local radio.

Dutton said the government's problem was not with the Chinese people but rather "the values or virtues or the outlook of the Chinese Communist Party".

Australia last year enacted new powers -- widely seen as targeting China -- that allow it to scrap any agreements between state authorities and foreign countries deemed to threaten the national interest.

Canberra's first target was the BRI, a vast network of investments that critics say is cover for Beijing to create geopolitical and financial leverage.

Prime Minister Scott Morrison said the decision "followed through" on his government's pledge to ensure Australia had a consistent foreign policy which strives for a "world that seeks a balance in favour of freedom".

The schism between Australia and its largest export market widened on Thursday as Beijing railed at the abrupt cancellation and warned it would damage trust between the two countries.

The move "has poisoned mutual trust... and seriously harms China-Australia relations", said foreign ministry spokesman Wang Wenbin at a briefing in Beijing.

"China reserves the right to take further action in response to this."

Earlier, Dutton said he would be "very disappointed" if China retaliated but retorted that Australia "won't be bullied by anyone".

"We are going to stand up for what we believe in and that's exactly what we've done here," he said.

"Fraying relations"

The BRI is the showpiece of Xi's vision for Asia, a lattice of ports, train tracks, economic zones and other infrastructure investments to tether the continent and beyond tighter into China's commercial orbit.

It was unclear if the Victoria state deal had "any projects that were in the pipeline or whether any investments had been pledged", Peter Cai, a specialist on Australia-China relations at the Lowy Institute, told AFP.

But Canberra's bold move is an indicator "of how fraying foreign relations or political instability can affect China's global infrastructure push", he said.

China has already slapped tariffs on more than a dozen Australian industries, including wine, barley and coal, in what many see as punishment for Canberra's increasingly assertive stance against its largest trading partner.

Australia infuriated China by calling for an independent probe into the origins of the coronavirus pandemic, banning controversial telecoms giant Huawei from building Australia's 5G network and tightening foreign investment laws for corporations.

Other agreements between foreign powers and local governments are still under consideration, and Canberra could yet target the presence of Chinese government-backed Confucius Institutes at Australia's public universities.

Critics say the institutes, which have been the subject of controversy on some campuses, promote the Communist Party's self-serving version of Chinese culture and history.