SYDNEY (Reuters) - New Zealand warned in a defense report on Friday that China’s rising influence in the South Pacific could undermine regional stability, in comments likely to stoke bilateral tension.

New Zealand and Australia have traditionally held the most influence in the South Pacific, but the New Zealand government said in the report it was now losing its sway over small island nations to China.

“New Zealand’s national security remains directly tied to the stability of the Pacific. As Pacific Island countries develop ... traditional partners such as New Zealand and Australia will be challenged to maintain influence,” the government read.

“China holds views on human rights and freedom of information that stand in contrast to those that prevail in New Zealand.”

New Zealand has announced it would increase foreign aid by nearly a third, in part to counter China’s rising influence in the South Pacific.

“We live in turbulent times, the world is changing and there has been a re-emergence of great power competition,” New Zealand Defense Minister Ron Mark told reporters in Wellington.

Australia is the largest donor of aid to the Pacific, committing A$166.4 million ($129 million) this year. But with a large budget deficit, its economic aid budget will fall, opening a door for China, analysts say.

Chinese economic aid to the region is growing significantly, according to Australian think-tank the Lowy Institute, with an estimated $1.78 billion spent in the decade to 2016.

China has denied that it is using its aid to exert influence in a region blessed with significant natural resources.

But Australia’s outgoing defense chief, Mark Binskin, cited “the influence of some nations starting to come down into the southwest Pacific” as among his concerns, in an interview with Fairfax Media published on Friday.

“I don’t think there is trust there,” he added, referring to China’s military building up on tiny islands and shoals in the South China Sea despite promises it would not.

In February, Taiwan accused China of pressuring Papua New Guinea, a large recipient of Chinese aid, to downgrade relations.

Australia, citing its suspicion of Chinese meddling in its politics, last month passed tough legislation seen as limiting China’s reach.

China has denied any such meddling.

Australia plans to spend a significant portion of its Pacific aid budget building high-speed internet cables for Papua New Guinea and the Solomon Islands, and will bolster cyber security for Vanuatu, to counter China’s growing influence.

Pacific Island leaders, including those from Australia and New Zealand, will meet in September on Nauru island for an annual summit, where a new agreement covering defense, law and order, humanitarian assistance is expected to be signed.