China has accused Australia of holding a "Cold War mentality", after the Prime Minister said he is taking on board allegations of foreign influence in the domestic political process.
The federal government has called on Dastyari to resign because he allegedly warned Chinese Communist Party-linked Huang Xiangmo that his phone was likely being tapped by intelligence services, including those of the US government.
The comments sparked a complaint from China's foreign ministry.
"This kind of statement caters to the irresponsible reports by the Australian media that are biased against China, absolutely clutching at straws, purely fabricated and poisoning the atmosphere of China-Australian relations", said China's foreign ministry spokesman, Geng Shuang.
'We are astounded by the relevant remarks of the Australian leader.
Australian Prime Minister Malcolm Turnbull has doubled down on his criticism of Beijing interfering in domestic politics, while insisting the communist leadership will respect his tough talk.
Earlier in the week, the Chinese embassy in Canberra issued a fiery statement denying it interfered in the politics of other countries and accusing Australian media of peddling racism towards Chinese students.
Turnbull spoke of China while introducing the legislation to the lower house. "We take these reports very seriously", he said.
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"Our relationship with China is far too important to put at risk by failing to clearly set the terms of healthy and sustainable engagement".
The head of Australia's Department of Foreign Affairs and Trade Frances Adamson warned universities in October they needed to better protect themselves from the rising influence of the Chinese Communist Party.
Senator Dastyari tipped off Chinese Communist Party-linked political donor Huang Xiangmo to the likelihood his phone was being tapped by Australian agencies.
'I sincerely advise Australian universities to pay more attention to their quality of education and stop treating Chinese students as a cash machine, ' Beijing-based journalist Lilly Wang wrote on Wednesday. "It was an assertion of sovereignty, it was an assertion of pride", he said, switching between speaking Mandarin and English.
Investigators believe China is trying to influence Australian politics by targeting state and local government elections.
ASIO security officials consider the scheme as part of a ploy to influence Australian politics, and one of the candidates mentioned gained office and is still there today, The Weekend Australian reports.
"How can the U.S. and how can the United Kingdom be prepared to share sensitive intelligence information if they think that Senator Dastyari could potentially sit in the government?" he told the ABC.
"You just have to look at who leaked the supposed Asio briefing to the press", Conroy told the ABC.