A Chinese company plans to build a city on Australia's doorstep in a move set to inflame tensions between Beijing and Canberra.
A Chinese company has approached the Papua New Guinea (PNG) government with a proposal to build a $39 billion city just kilometres from Australia's sea border, according to leaked documents obtained by The Australian.
Hong Kong-based WYW Holding asked PNG Prime Minister James Marape in April to sign off on a "build operate transfer" deal to build the city on the island of Daru, situated just two kilometres Australia's border in the Torres Strait.
If approved, the "New Daru" would be passed onto PNG after an unspecified period of Chinese control.
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A spokesman for Marape told The Australian he was "unaware of such projects", but Home Affairs Minister Peter Dutton said Australia was "keen to discuss" the issue with PNG.
"I think there are all sorts of sovereignty issues and local issues in terms of land owners and land rights," he told Today.
"We will look at it closely, but Australia will always act in our best interests and we will support our neighbour."
Daru is the capital of PNG's impoverished Western Province and has a population of just 15,000. The island has been ravaged by an extremely drug-resistant strain of tuberculosis.
But the Australian Strategic Policy Institute's Jonathan Pryke said Beijing was "more likely to grow a third arm" than complete the project and warned the Australian government against by overreacting.
"You really need to start taking it seriously if they start importing a huge amount of materials because it's all just for show," he told NCA NewsWire.
"Australia can't jump and react to everything because we're just jumping at shadows.
"We're talking about a project here that's almost twice the size of PNG's annual GDP. I don't need to look at the memorandum of understanding to know that is an insane proposal."
He said middlemen like WYW Holding went to "far flung, wild west parts of the world" in a bid to make quick money.
"(If they) get enough attention around them and someone in Beijing starts paying attention, money might start to flow and they can get rich. That's what it's all about," he said.
Beijing previously pledged to build a university in the electorate of former PNG leader Peter O'Neill, a plan Pryke said had amounted to "a bit of land clearing and four demountables".
Treasurer Josh Frydenberg said he would "wait until more details" were available, but the government was in "constant dialogue" with PNG.
"We have a close relationship with the PNG government ... let's not jump to conclusions here," he said on Friday.
It comes after a Chinese company last year signed a memorandum of understanding to build a $200m industrial fishing complex on Daru.
The revelation alarmed some national security experts who feared the site, which would be located 150 kilometres from the Queensland mainland, would double as a Chinese military facility.
Concerns were also raised the commercial fishing complex would decimate traditional fishing practices in the Torres Strait.
Labor foreign affairs spokesperson Penny Wong wanted guarantees the proposal, if built, would not threaten Australia's national security interests.
"Scott Morrison should explain what he knows about the 'New Daru City' proposal," she said.
"Australia should be the partner of choice in our region, working with allied and aligned nations to build the sort of region we want – one that is stable, prosperous and respects sovereignty."
But independent senator Rex Patrick said any Chinese presence on Australia's doorstep would be harmful to its national interest.
"Scott Morrison needs to make that very clear to his PNG counterpart and offer support for alternative projects in the Fly River Province, one of the poorest regions of PNG," he told NCA NewsWire.
"Australia needs to be proactive, not reactive, in heading off Chinese proposals to establish a strategic presence next to the Torres Strait and a bridgehead for expanding the Chinese Communist regime's influence and interference in our nearest neighbour."