Australia's Prime Minister said the Australian navy has a "perfect right" to traverse the South China Sea after a media report yesterday that the Chinese navy had challenged three Australian warships in the hotly contested waterway.

The Chinese "challenged" two Australian frigates and an oil replenishment ship this month as the Australian ships were sailing to Vietnam, ABC reported, citing anonymous defence officials.

It is not clear what took place during the encounter while China was conducting its largest-ever naval exercises in the region.

Prime Minister Malcolm Turnbull did not comment on the specific incident when questioned by reporters in London.

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"We maintain and practise the right of freedom of navigation and overflight throughout the world and, in this context, we're talking about naval vessels on the world's oceans, including the South China Sea, as is our perfect right in accordance with international law," Turnbull said.

The Defence Department said it did not provide operational details related to ships transitting the South China Sea.

But the department confirmed the three warships had arrived in Ho Chi Minh City on Thursday.

They are making a three-day goodwill visit to Vietnam.

Neil James, executive director of the Australian Defence Association, a security policy thinktank, said the first aspect of such a challenge was usually a radio warning that the Australians were in Chinese territorial waters and a demand for identification.

The Australians would have replied that they were in international waters.

The next levels of challenge involve sending an aircraft and ship to investigate.

"It just escalates. Eventually if they're in your territorial waters and they're not meant to be there, you might fire a shot across their bows - but no one has done that for years, apart from the North Koreans," James said.

China claims virtually the entire South China Sea and has built several islands to bolster its position in the waterway where other governments have competing claims and which is one of the world's busiest sea lanes.

Australia has resisted pressure from the United States, its most important defence ally, in challenging the Chinese territorial zones, which are not recognised by international law.

Admiral Harry Harris, the commander of US forces in the Pacific, has invited Australia to mount joint naval patrols in the South China Sea and has described China as "a disruptive transnational force".

US President Donald Trump has nominated the outspoken critic of China as the next US ambassador to Australia.

- AP