The Australian think tank, the Lowy Institute, has urged the incoming Australian government to work with China in the region.
It says better co-operation would send a signal to local states there is no value in playing off the two countries to attract more aid.
It says while Australia and China signed an MOU on development co-operation earlier this year, there were also hints at official concerns from Australia about China's rise in the region in the 2013 Defence White Paper.
The think tank says an unhelpfully mixed message is being sent to Pacific Island countries which enables their leaders to play on fears in demands to Australia for aid with fewer strings attached.
It suggests co-operating on projects including climate change mitigation, the development of high-yield crops and joint responses to disaster relief.
The Institute says China wants to be seen as a globally responsible player and such a constructive approach would be noticed internationally and give the region's countries greater certainty.