The one-week trip is designed to shore up ties between Australia and its largest trading partner, but other issues are getting in the way.
China correspondent Stephen McDonell reports from Hainan Island.
Presenter: Stephen McDonell, China correspondent
Speaker: Hong Nong, deputy director of the Research Centre for Oceans Law and Policy at the National Institute for South China Sea Studies
STEPHEN MCDONELL: I'm at the southernmost tip of China's land mass but this country's territorial claims extend much, much further - out into the ocean for hundreds of kilometres all the way down to various rocky outcrops just off the coast of Malaysia and the Philippines.
Looking out over the South China Sea from Hainan Island all seems calm but there are tensions brewing in this region as China flexes its muscles.
Tomorrow world leaders, including Australian Prime Minister Julia Gillard, will join captains of industry here on this island. Yet even in the days leading up to the hosting of this business summit, China hasn't been afraid to show off its military hardware in disputed waters.
(Sound of guns firing)
Four Chinese naval vessels including a guided missile destroyer, two guided missile frigates and an amphibious attack ship have been carrying out live fire drills. Helicopters, missiles and marines with sub-machine guns have all been on display on Chinese television.
Vietnam, the Philippines and Malaysia are becoming increasingly concerned.
Dr Hong Nong is deputy director of the Research Centre for Oceans Law and Policy at the National Institute for South China Sea Studies.
HONG NONG: It's very rational that every small country worries about its big neighbours. But in reality Chinese always emphasising they are looking for peaceful development.
STEPHEN MCDONELL: The potential for escalation - whether intentional or otherwise - is considerable.
The stakes are high. Malaysia has oil rigs in waters claimed by China.
Last week Vietnam accused China of firing on one of its fishing boats.
And China sees the United States beefing up its own presence in the region as part of the so-called pivot to Asia.
Dr Hong Nong:
HONG NONG: China is worried whether the US has a role in driving the South China Sea dispute into a more difficult situation. But I think China's worries about the US or other countries is the same as other countries' suspicion of China. So I think what is missing now is the confidence building between all these countries.
STEPHEN MCDONELL: Nearby on the Korean Peninsula war games and threats abound.
The summit here may be about business but there should be plenty of talk about a region with growing instability.
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