According to the Fairfax report, initial talks have already begun with Vanuatu, which could result in China establishing a major military presence and upsetting the delicate strategic balance in the region.
"Chinese presence in Vanuatu, while today about fishing access and commercial trade, tomorrow could represent a threat to Australia's northern approaches", he added.
Bishop said Australian engagement with South Pacific nations was "one of our highest foreign policy priorities" and that Australia had partnered with China on development projects in the region, for example an anti-malaria project in Papua New Guinea.
A Chinese foreign ministry spokesman dismissed the report as "fake news" and referred reporters to Vanuatu's denial.
China has also become increasingly active in the South Pacific, undertaking infrastructure projects and providing aid and funding to small, developing island nations.
Medcalf said a Chinese military base on Vanuatu would pose significant problems for Australian interests.
Prime Minister Malcolm Turnbull said he had been advised there had been no request from China for Vanuatu to host a base.
However, Mr Regenvanu told the ABC the reports were false, and that no one in the government had ever talked about a Chinese base of any sort in Vanuatu.
Foreign Minister Julie Bishop visited Vanuatu with Prince Charles on Saturday in a diplomatic tour that Fairfax Media has been told was aimed at demonstrating the merits of the Commonwealth's commitment to a free and open system of global rules.
"That will be between those two sovereign nations and I can't comment on the validity of that", she said.
New Zealand-based security scholar Marc Lanteigne said the Fairfax report, while unconfirmed, was "a wake up call" to Australia, New Zealand and the United States.
"We are a non-aligned country. We are not interested in militarisation, we are just not interested in any sort of military base in our country", he said.
Australian Foreign Minister Julie Bishop, who travelled to Vanuatu last weekend with Britain's Prince Charles, earlier said she was confident of Canberra's strong relationship with Port Vila.
National leader Simon Bridges said it's not necessarily wrong when other countries invest in others' infrastructure.
"I would hope the upsurge in the paranoia about China in Australia is not used to destroy or denigrate the good relationship Vanuatu has with Australia".
"The more you invest in the Belt and Road initiative, the more the Chinese are in a position to force your country to align politically in terms of policy", Davis told CNN a year ago, referring to China's ambitious One Belt One Road (OBOR) global development strategy.
"We don't know what the consequences are when (Pacific nations) have to pay back some of these Chinese loans", she said.
Chinese money has already helped finance a new wharf on the north island of Espiritu Santo, alongside an upgrade to the worldwide airport.
Zhang Baohui, a mainland security expert at Hong Kong's Lingnan University, said while China had a thirst for long-term bases and reliable ports, the Indian Ocean was a greater priority.