Australian and Chinese officials including Beijing's top army general had a "direct and blunt" exchange over the Asian giant's island-building in the South China Sea this week, Fairfax Media has learnt.

China also cautioned countries including Australia against following the US lead in carrying out "freedom of navigation" exercises near Beijing's artificial islands to signal they do not recognise the territorial claims.

The dialogue between Australia's defence brass and General Fang Fenghui, Chief of the General Staff of the Chinese People's Liberation Army, sparked controversy this week because Defence failed initially to release any statement about the talks or inform the Australian media they were happening.

Yet the Chinese government informed their country's journalists in advance of the dialogue and provided a statement outlining the main points of the talks which were co-hosted by the Chief of the Defence Force Mark Binskin and Defence Department Secretary Dennis Richardson.