SYDNEY - China's debut in the world's largest naval exercise is a "leap of trust" as it teams with the United States and US allies at a time of heightened regional tension over territorial disputes, a leading Australian Asia expert said on Friday.

Michael Wesley, professor of National Security at the Australian National University, told the ABC that China's inclusion in RIMPAC 2014 is highly significant.

"It's important to include China in these sorts of coalition exercises in order to offset what is probably a growing belief in China that it is being encircled by tightening alliances and partnerships among its neighbors, and among its neighbors and the United States.

"I think that it's also a reasonable leap of trust by the Chinese that they will take part in these US-led exercises that will be heavily participated in by US allies as well."

Australian ambassador to China Frances Adamson said there will be challenges in the future as China rises as a regional power.

Speaking to a business audience in Sydney on Thursday, Adamson said the relationship with Australia has reached a new strategic level and argued that with the possible signing of a free trade agreement by November China would continue to see Australia as a " valuable partner".

But as China assumes a more active leadership role internationally and continues to assert its territorial claims, Adamson said diplomacy will get more complex and challenging.

"I firmly believe though that we each need to develop a relationship where we can not only talk about the millions and billions and the things we count in the bilateral trade and investment relationship, but also good in-depth discussions about these sorts of issues," she said.