Australia and PNG are to begin negotiations on a defence treaty in a move that could have major implications for national security and the Pacific's strategic landscape.

A key war game will be held outside of Australia for the first time, as the Federal Government moves towards a major defence agreement with a close ally, dealing a major blow to China.

Australian ships and aircraft are working with New Zealand’s military to monitor three Chinese warships which have sailed past Sydney towards the Tasmanian Sea. It comes as Australia begins negotiations with Papua New Guinea on a landmark new defence treaty.