Prime Minister Malcolm Turnbull says China understands Australia's approach to foreign investment, despite President Xi Jinping raising it during talks on the sidelines of the G20 in Hangzhou.

Mr Turnbull met Mr Xi in his first bilateral meeting of the two-day summit.

China's state media said President Xi urged Australia to create a "fair, transparent and predictable environment" for foreign investment, in the wake of recent decisions by Australia to block Chinese bidders from major electricity and agricultural sales.

"We mostly say yes, we invariably say yes, but from time to time we say no, and we make no bones about that, and China respects it," Mr Turnbull said.

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He also emphasised that it was easier for Chinese companies to invest in Australia than for Australian companies to invest in China.

The issue of Chinese investment is one of the contentious points between the two countries.

Mr Turnbull said he also urged China to peacefully resolve the South China Sea dispute "in accordance with international law".

China in July lost an international court case filed by the Philippines over the legal basis of China's claims in the disputed waterway — a decision China ignored.

In response, President Xi reportedly urged Australia to respect China's "core interests".

The sideline meeting is one of several Mr Turnbull is having during the G20, which brings together leaders of the world's largest economies.

The official agenda aims at finding ways to kick-start economic growth amidst a slowdown in China and sluggishness in Europe.

Earlier, during an address to hundreds of business delegates, Malcolm Turnbull took a swipe at resurgent calls for protectionism in Europe and the United States.

Mr Turnbull urged G20 leaders to fight to keep their markets open to trade, using Australia as an example of where trade has helped the economy to continuously grow.

"Protectionism, trying to turn back the clock of economic reform, that is the road to poverty," he said.

"It would be a mistake of historic proportions for the G20 to stand by while scare campaigns not based on facts or evidence foster protectionism, or indeed isolationism," he added.