Australian authorities say a Chinese warship injured Australian military personnel from the HMAS Toowoomba off the coast of Japan last Tuesday with sonar pulses.
The Australians were operating in international waters in support of a United Nations mission when the incident happened.
The divers suffered minor injuries to their ears.
Prime Minister Anthony Albanese has called the incident dangerous and unprofessional.
China's defence ministry said its navy destroyer did not carry out any activities that might affect Australian diving operations and "kept a safe distance from the Australian ship".
Australia's remarks on the incident were "completely inconsistent with the facts", China said in a statement.
Opposition foreign affairs spokesman Simon Birmingham says it doesn't bode well that China is not acknowledging the facts of the circumstances.
"That is very regrettable, because if you're not willing to acknowledge the facts, then it doesn't speak well for your willingness to change your behaviour," he told ABC radio on Tuesday.
"That's really what we and so many other nations across the region need to see the Chinese military do, which is to change their operating protocols and their behaviour to be less confrontational."
Not doing so increased the risk of an accident or miscalculation in the future and, in turn, "increases the risk of possible escalation with all of the devastating consequences that would bring to bear," he said.
The incident with a navy ship happened just days before the prime minister met Xi Jinping at APEC.
Opposition Leader Peter Dutton branded China's response "propaganda".
"We shouldn't abide it for a second," he said.
"The fact is that there is aggressive behaviour taking place and our country should be calling it out."
The prime minister remains under pressure to confirm whether he directly raised the incident with Chinese President Xi Jinping when they met on the sidelines of the APEC summit.
The incident was kept under wraps for days and only made public after Mr Albanese left the summit to return home.
He's refused to detail the contents of private discussions, but Senator Birmingham said Mr Albanese had been happy to talk about issues raised with Mr Xi when he visited China.
"So for him now to come back to Australia and say I won't reveal the content of conversations is quite disingenuous and in complete conflict with the evidence," he said.
Mr Albanese and top ministers have said Australia's objections have been made clear and raised with Chinese authorities.
But Mr Dutton called for Mr Albanese to be "open and honest" about whether he raised the issue.
"If he didn't, then he's made a catastrophic mistake and he needs to apologise," he said.
"If he did raise it, well, he needs to come up with a proper explanation as to why he continues to talk in riddles."
with Reuters
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