China formed policing ties with Vanuatu in 2023 and has donated equipment including drones, patrol boats and vehicles to its police force.
Australia and Vanuatu signed a sweeping economic and security agreement on Monday that bars the establishment of any foreign military base on the Pacific island.
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Vanuatu is at the centre of strategic rivalry between China and US allies in the South Pacific and Australia has expressed concern that Beijing is seeking a permanent security presence in the region.
The agreement commits Australia to greater economic support for Vanuatu, whose largest external creditor is China, and it stops a foreign military power establishing a base there.
"What this does do is to provide certainty for Australia that there will be no foreign military base," Prime Minister Anthony Albanese told reporters after signing the deal in Canberra with his Vanuatu counterpart Jotham Napat.
"We have concluded a balanced agreement that will protect our collective and individual security and our sovereignty," he added.
China's navy has made repeated port calls to Vanuatu.
Beijing also funded the expansion of a wharf in Luganville, once the largest US military base in the South Pacific, fuelling concern in Canberra and Washington that China wants a naval base.
China and Vanuatu previously said the wharf was for cruise ships.
The Nakamal Agreement commits Vanuatu to rejecting the militarisation of infrastructure, said Napat.
"As a country, we have in fact passed an act in parliament not to allow any militarisation to actually be used for our critical infrastructure," he told reporters at a news conference after the signing.
Military infrastructure
The agreement states that "to reinforce Pacific collective security and sovereignty Vanuatu shall not permit its territory to be used for any foreign military base or infrastructure."
It also recognises Australia as "Vanuatu's longstanding primary policing partner" and says Vanuatu will prioritise policing requests to other members of the Pacific Islands Forum regional bloc.
China formed policing ties with Vanuatu in 2023 and has donated equipment including drones, patrol boats and vehicles to its police force.
The agreement says Australia and Vanuatu will elevate assistance in "police training and equipment, policing, maritime security, cyber security, intelligence cooperation and infrastructure."
The Vanuatu treaty is the latest in a string of agreements Australia has struck with Pacific island nations, seeking to curb China's expanding security influence.
Chinese police have maintained a presence in Solomon Islands since signing a secret security pact in 2022.
Vanuatu has said it is separately negotiating an economic agreement with China, which has built roads and government buildings in the South Pacific nation over a decade.
A former Australian diplomat in the Pacific, James Batley, said the contest between Beijing and Canberra for influence would continue.
"Vanuatu's long tradition of non-alignment means that it won't simply abandon its relationship with China. Nor will China abandon its attempts to undermine Australia's interests in Vanuatu," he told the AFP news agency.