Australian Prime Minister Malcolm Turnbull said the country's defence spending will be increased by $21.6 billion (A$30 billion) over the next 10 years.
The higher defence budget will be spent on buying new equipment such as frigates, armored personnel carriers, strike fighter jets, drones and submarines, the prime minister said.
The country's defence spending will hit A$195 billion, or 2 percent of GDP, by 2021-2022.
The move is significant in the backdrop of China's increasing military assertiveness in the region and its frequent clashes with countries that have staked claim to South China Sea islands.
Defence publication IHS Jane's said in a report this week China's increased military spending and its growing assertiveness in territorial disputes are forcing countries in the region to boost their weapons purchase, leading to an Asia-Pacific arms race. By 2020, the region's total military spending will rise to $533 billion a year from $435 billion in 2015, IHS Jane's has said.
China's recent deployment of missiles and a high frequency radar system in the disputed waters are part of its plans to militarily dominate East Asia, head of the US Pacific Command Admiral Harry Harris said this week.
Beijing has territorial disputes with many countries in the Pacific Rim and it has raised defence spending multifold in recent years.
China's reclamation of land at strategic island clusters in the disputed waters and the building of military bases and airstrips have angered Vietnam, Malaysia, Brunei, the Philippines and Taiwan.
The US has undertaken a freedom of navigation' mission in the disputed waters, sending its naval vessels into waters claimed by China and its regional rivals.
US has no territorial claims in the South China Sea but it sees China's land reclamation near the island chains of Paracel and Spratlys and the building of airstrips as attempts to militarise the region.
Turnbull said the defence strategic plan was designed in the backdrop of the changing nature of regional security scenario, particularly China's economic and military rise.
China's parliament is set to announce another double-digit rise in military spending in its meeting next month. Beijing's military spending last year was over 10 percent of the budgetary spending, at $136.4 billion.
Defense Minister Marise Payne highlighted the need for China to give reassurance to its neighbors in its defence policies.
"The Government will seek to deepen and broaden our important defense relationship with China while recognizing that our strategic interests may differ in relation to some regional and global security issues," Payne said, according to Reuters.
Australia has finalised plans to build a submarine fleet, and Japan and France are competing for the A$50 billion project even as China expressed concerns over the move.
Payne also said Australia is pushing ahead with a project to build nine frigates and 12 offshore patrol vessels.
The country will also buy unmanned drones for the first time and boost its cyber security investment, the minister added.