Trade routes vital to Australia's prosperity could be drawn into armed conflict unless new lines of communication are devised, Tony Abbott says.
Speaking in Brunei where he was attending the East Asia Summit, the Prime Minister said yesterday a harmonious South China Sea was critical to Australia.
"Almost 60 per cent of our trade goes through the South China Sea, so strategic stability is very important," he said.
Japan, the Philippines, Vietnam, Malaysia and Brunei have competing claims in the South China Sea and China has been accused of acting aggressively in the disputed waters.
Mr Abbott said he did not want there to be any sense of other EAS members "ganging up" on China but there was a risk of conflict.
"There's some risk, no doubt about that," he said. "But I think it's a risk that's reducing because of the kind of work that is happening at a conference such as this.
"It is important that we do have a clear and understood code of conduct for parties in the South China Sea ... so in the event of any tension it can be dealt with before it gets out of hand."
Japanese PM Shinzo Abe "consistently" raised the code of conduct in his meetings with other EAS members, his advisers said.
Mr Abbott described Japan as "Australia's best friend in Asia" and explained his decision to back Mr Abe's determination for his nation to change its pacifist constitution and become more militarily active.
"As time goes by and Japan puts the wounds and scars of World War II increasingly behind it, and other countries put the wounds and scars of World War II behind them, Japan is going to play a more important part and, dare I say it, a more 'normal' part in the life of the world," he said.
Japan's post-WWII constitution prevents it taking military action except in self-defence.
Mr Abbott said he did not raise the whaling issue with Mr Abe, the source of tension for years.
He also met Chinese Premier Li Keqiang in Brunei, following on from his meeting with Chinese President Xi Jinping on Sunday at APEC in Bali.
The PM aims to strike free trade deals with China and Japan within a year and he indicated Australia would be less hectoring about human rights abuses.
"We will say our piece when there are major human rights abuses taking place but, generally speaking, it's not the job of the Australian Prime Minister to stand up and give lectures to the wider world," Mr Abbott said.