A Chinese-Australian writer could face the death penalty or a long jail term after China confirmed he had been arrested on suspicion of spying.

Yang Hengjun, a 54-year old Sydney-based academic, has been held without charge after flying into Guangzhou from New York with his wife and child in January.

He has been under investigation after being accused of harming China's national security, but Australian officials have been told he is now suspected of espionage.

It is understood the former Chinese diplomat was held at a residential surveillance centre in southern Beijing before being transferred a state security prison.

Australia has traditionally been keen to avoid friction with Beijing, but Yang's arrest will increase public pressure on Canberra to take a tougher line against its most important trade partner.

“We have serious concerns for Dr Yang's welfare, and about the conditions under which he is being been held. We have expressed these in clear terms to the Chinese authorities," foreign minister Marise Payne said.

"I respectfully reiterate my previous requests that if Dr Yang is being held for his political beliefs, he should be released.”