Hawke weighed up sanctions on China

It's hard to imagine any circumstances today where Australia would entertain the idea of slapping economic sanctions on China.

But in the wake of the Tiananmen Square massacre in 1989 the Hawke cabinet debated doing just that as it considered how Australia should manage future dealings with China now that a line had been crossed.

Cabinet papers from July 1989, just one month after thousands of pro-democracy activists were killed in Beijing, show just how seriously Tiananmen strained the bilateral relationship.

"An easy or early return to 'business as usual' is, in the aftermath of the Tiananmen massacre, simply not an option," state the cabinet documents, made public for the first time in 25 years.

Australia took what it considered to be one of the strongest stands in the world, downgrading its relationship with China over the "gross abuse of human rights" and "slaughter" of students.

Prime Minister Bob Hawke cancelled a planned trip to China, suspended all bilateral political visits and halted defence sales indefinitely.

A Chinese trade delegation to Australia was postponed and a Chinese diplomat at the consulate in Sydney was granted permission to remain in Australia on humanitarian grounds.

In an unprecedented move, Hawke then extended the visas of thousands of Chinese students in Australia so they wouldn't have to go home.

But the cabinet understood it was treading a fine line and had to keep its long-term commercial interests in mind.

"Despite our abhorrence, Australia may have to deal with the new Chinese leadership for some time," it stated.

"Unlike Europe, Australia cannot walk away from China."

It wanted to maintain China's progress towards economic reform and keep open as many lines of communication as possible, even during the diplomatic stand-off over Tiananmen.

The government decided against cutting off aid to China or putting limits on cultural, economic or student exchanges, which it regarded as a way of exposing Chinese to democratic society.

It also scotched the idea of slapping an embargo on trade with China, an idea drafted but dropped at cabinet.

It concluded that unilateral action for China - which in 1989 accounted for less than two per cent of China's trade - would have a negligible impact and only harm Australia's future interests.

Given the strength of two-way trade today, perhaps it was a prescient move.

Today China is Australia's number-one trading partner by a country mile, with the flow of goods and services between the two countries exceeding $150 billion in 2013.

The nations just finalised a free-trade agreement after nearly a decade of negotiations.