SYDNEY (AFP) - Australia's Foreign Minister Julie Bishop welcomed her Chinese counterpart to Sydney Sunday, saying the two nations were "on track" to sign a free-trade agreement this year strengthening their relationship.

Australia is hosting Foreign Minister Wang Yi for the second annual Australia-China Foreign and Strategic Dialogue, which comes ahead of Chinese President Xi Jinping's visit in November for the G20 summit in Brisbane.

"The Australia-China relationship is strong, it is mature, it is growing," Ms Bishop said at a media conference with Mr Wang.

"China is Australia's largest two-way trading partner. We are on track to sign a free-trade agreement with China later this year which will further strengthen this relationship."

The trade talks began in 2005, but stalled last year over agriculture and China's insistence on removing investment limits for state-owned enterprises.

Over the past year Australia has sealed free trade deals with Japan and South Korea.

The bilateral talks follow Australia's push to forge closer ties with Japan, China's regional rival whom Australian Prime Minister Tony Abbott has called Australia's "closest friend in Asia".

Mr Wang, in an apparent gentle swipe at the Abbott administration, acknowledged that China "may not be Australia's closest friend at the moment, but we can surely become your most sincere friend".

He added that Australia was a "key cooperation power" for China in the Asian region.

"China welcomes and supports Australia to further understand Asia and to integrate into Asia," Mr Wang said through a translator.

"And of course, we would also like Australia to play an active role as a bridge and as a link between the East and the West."

Ms Bishop said the bilateral talks came at a time of "great global challenge" and were an opportunity to discuss the movement of citizens from the two countries to Iraq and Syria to fight for violent jihadist groups such as the Islamic State (ISIS).

"The conflict in Syria and Iraq affects both our nations, for foreign fighters are leaving our shores to take part in the brutal and bloody conflict in the Middle East," she said.

"Our meeting together affords us an opportunity to discuss ways that we together can combat terrorism and extremism such as we've seen with the emergence of ISIL," she said, using one of the acronyms by which the ISIS is known.