Retired US General and former director of the CIA David Petraeus says Australia needs to "be firm" with China, urging the nation to take part in freedom of navigation exercises in the South China Sea.

Addressing a Liberal Party gala dinner in Sydney, General Petraeus also reassured the audience Australia can still rely on its most important strategy ally, saying there is "more continuity than change" in US President Donald Trump's foreign policy.

"Follow the money and follow the troops, don't follow the tweets," he said.

General Petraeus gave a frank assessment of the rising threats in the region, describing China's claim over large parts of the South China Sea as "outrageous" and urging the US and Australia to be firm in its response.

"Several years ago when I heard, for example, secretary of defence Ash Carter in his inaugural speech literally pound the podium and say, 'We will sail anywhere and fly anywhere'," he said.

"It took us eight months just to sail through the South China Sea. That's not firmness."

General Petraeus said freedom of navigation exercises were "hugely important" and Australia should be conducting patrols through the disputed waters, possibly as part of a coalition.

Although he acknowledged Australia found itself in a "curious position" in which its number one trading partner was also "its number one security cause for concern".

During a visit to Australia last month, US senator John McCain echoed the same sentiment, suggesting Australia take part in joint exercises in the region.

General Petraeus told the audience he believes Islamic State will be defeated on the ground and predicted Australia would "either lead or play a very significant role" in the fight against the group in the Philippines.

Australia is stepping up its role in that conflict and will soon send high-tech surveillance aircraft over the southern region of Mindanao to fight IS-inspired groups.

General Petraeus, who led international forces in both Iraq and Afghanistan, was sentenced to two years' probation and fined $US100,000 ($133,700) in 2015 for the unauthorised removal and retention of classified information.

Despite a controversial end to his life as a public official, General Petraeus is highly regarded in military circles and a "friend and valued sounding board" to the Foreign Minister Julie Bishop.

Mr Trump considered General Petraeus for the position of secretary of state last year.