Mr Shorten stripped Senator Dastyari of his roles as deputy opposition whip in the Senate and chair of a parliamentary committee after audio emerged that contradicted his defence of a 2016 press conference in which he sympathised with China's position in the South China Sea dispute, contradicting Labor policy.

The recording came after Fairfax Media revealed that Senator Dastyari gave counter-surveillance advice to businessman Huang Xiangmo, a Chinese Communist Party-linked political donor previously paid a legal bill for him and stood beside him at the notorious press conference.

It is the second time Mr Shorten has demoted Senator Dastyari, who was forced off the opposition frontbench in late 2016 following the initial revelations concerning his dealings with Chinese interests in Australia. The senator has since sought to rehabilitate his image and was promoted to the deputy whip position in February.

"At an individual level, as a human being, I feel for him. But as leader of the Labor Party, I resent or am frustrated that he put us in a position where I had to sack him...He has a long, long journey to rebuild trust," Mr Shorten said on Thursday afternoon.

"I am deeply disappointed with Senator Dastyari, as leader of the Labor Party, that he has put me in a position where I have to sack him again, and the point about this is that I think he will know his colleagues are deeply, deeply frustrated with his very poor judgment."

The government, which compelled Senator Dastyari to front up to Parliament and further explain his conduct on Thursday, has insisted that he must resign from federal politics entirely.

"This is a senator who has made it abundantly clear that his first allegiance is not to Australia. He has been taking money to pay his personal debts - he's acknowledged that - from a foreign national who is very, very close indeed to a foreign government," Mr Turnbull said.

"Now we learn - and he has not denied it - that he has been providing counter-surveillance advice to that foreign national in order, presumably, so that what he assumed were the operations of Australia's security agencies could be frustrated. Sam Dastyari should get out of the Senate, full stop. That's his duty."

Mr Turnbull added: "If he refuses to resign, Shorten should dump him from the Labor Party and let him languish in contempt on the crossbench."

Mr Shorten described the Coalition's disloyalty arguments as "rubbish" and insisted the demotion meant Senator Dastyari had "paid the penalty" through his demotion.

"He's been elected by the people of New South Wales, what I have done is I've stripped him of any position other than being a backbencher. To the best of my knowledge, if you have other information, by all means, what law has he actually broken?" Mr Shorten said.

"Most parliamentarians spend their time trying to get off the backbench. So for him to be put back on the backbench, I think that is a significant punishment.

Senator Dastyari said he never possessed or passed on classified information but has not denied he warned Mr Huang about the possible tapping of his phone in their face-to-face meeting in Mosman, which occurred after his resignation from the frontbench in September 2017.

Fairfax Media has reported that Mr Shorten had previously warned Senator Dastyari through "back channels" that domestic spy agency ASIO, which had briefed political leaders on fears about two China-linked donors, had an interest in Mr Huang.

Notifying the Senate of his demotion, Senator Dastyari said he was a proud Australian and accepted the consequences of his actions.

"I find the inferences that I am anything other than a patriotic Australian deeply hurtful. Nonetheless, I am not without fault," he said.

"In June last year, I had a press conference where I made comments that were in breach of Labor Party policy. The price I paid for that was high but appropriate. When a public official makes a statement that contradicts events, that has consequences.

"More recently, my characterisation of that press conference was called into question. A recent audio recording shocked me as it did not match my recollection of events. I take responsibility for the subsequent mischaracterisation. When a public officials makes a statement that contradicts events, there are consequences."

Meanwhile, in China, a major newspaper reacted to the controversy by labelling Mr Turnbull "an actor" motivated by domestic political problems.

The Global Times told Chinese readers Mr Turnbull had accused an Australian MP of "helping the Chinese Communist Party to overthrow the Australian government", yet had recently dined with a Chinese businessman himself.

The newspaper cited an "analyst familiar with the situation" as saying the attack on Senator Dastayari was directly related to Australian domestic politics.

"China and Huang Xiangmo were shot merely lying down," the source was quoted as saying.

"In order to shift the contradictions, the attack on the opposition parties is a time-tested measure by western politicians," the report said.

Global Times Deputy Editor Chen Ping, who attended an Australia-China High Level Dialogue in Melbourne last week hosted by Foreign Minister Julie Bishop, wrote in a separate editorial that Australian media outlets had made "inaccurate, unjust and even malicious reports on China", and he had raised this in the meeting.

- with Kirsty Needham