Some analysts said that while the political relationship was souring, commercial deals in the lucrative resources sector should be largely unaffected because both countries needed each other too much. Two-way trade is worth $53 billion a year.
Beijing cancelled a visit by Vice-Minister for Foreign Affairs He Yafei because Canberra granted a visa to exiled Uighur leader Rebiya Kadeer, blamed by China for instigating last month's ethnic riots in Xinjiang province.
"Australia very much regrets that China has decided to effect that response," Australian Foreign Minister Stephen Smith told parliament on Tuesday.
"We have a long-standing, productive economic relationship with China. From time to time in any bilateral relationship there will be difficulties. These difficulties need to be managed carefully and successfully, as Australia is currently managing difficulties that we currently have with China."
Political ties between Australia and its biggest trade partner have come under strain since Chinese authorities in early July detained four staff of Anglo-Australian mining giant Rio Tinto, including Australian Stern Hu.
They were formally arrested last week on suspicion of obtaining commercial secrets and bribery. But earlier accusations of stealing state secrets were left aside, prompting speculation China was opening the way for an easing of political tensions.
"Clearly Australia -China relations have gone downhill in a major way," said Alison Broinowski, a former Australian ambassador and Australia -Asia expert at Wollongong University.
Australia's Mandarin-speaking Prime Minister Kevin Rudd had warned that the world was closely watching how China dealt with the Rio Tinto case.
The detentions coincided with wrangling between Australian miners and Chinese steel mills over iron ore prices and came after a failed $19 billion bid by China's state-owned aluminium group Chinalco for a strategic stake in Rio.
"We are in uncharted waters in the relationship," said Ron Huisken, a China and security expert at the Australian National University in Canberra.
Beijing's unhappiness with Australia dates back to the release in May of a new defence strategy paper in which Canberra pointed to a stronger China as one of the main risks to continued stability in Asia, diplomatic analysts said.
"All of our defense and security and a great deal of our espionage is directed at China," said Broinowski.
Chinese Displeasure No Surprise
Huisken said China's displeasure should not have come as a surprise, as resource-rich Australia nudged closer to the centre of Chinese concern about securing mineral and energy imports.
Experts were wrong to expect business imperatives and Rudd's China expertise, including a stint as a Beijing-based diplomat, would bring a closer era in Australia -China ties, Huisken said.
"What Rudd has taken away from his immersion in things Chinese is that he is cautious about them," he said.
Nevertheless, business deals continue apace.
Upstart Australian miner Fortescue Metals Group this week agreed a slightly cheaper iron ore price with Chinese steel mills than that sought by major miners in exchange for up to $6 billion in funding.
Meanwhile, China's state-owned Yanzhou Coal Mining Co is seeking to buy Australian coal miner Felix Resources Ltd in a $2.9 billion deal requiring foreign investment approval from Australia 's government.
Shen Shishun, a former Chinese diplomat and now senior research fellow at the China Institute of International Studies, said he did not expect the friction to do lasting damage. The two countries were too important to each other economically, he said.
"I think overall China-Australia relations will remain healthy."
Huisken also said business interests would keep political differences at bay in the medium term, but tensions would remain as Rudd was apparently determined not to be steamrolled by China.
"It's these seminal cases where you set some ground rules, and if Australia does not protest, it will be done like a dinner. Precedent with China is everything," Huisken said.
