Foreign Minister Murray McCully, who has been talking to visiting United States Defence Secretary Leon Panetta, agreed there was potential for greater military to military relations with China.
He said there had been a focus on improving military co-operation with China in response to natural disasters in the region.
"It's an area in which New Zealand, given our history, has taken quite a strong role and I think that will be the area that we expand our ties with the Chinese military the most."
Celebrations next week will mark the 40th anniversary of diplomatic relations between China and New Zealand,
Mr McCully said the relationship was watched internationally because of the way it was conducted.
"I think it is an outstanding relationship," he said.
"We have just added another significant milestone to it with the announcement in the Cook Islands of the first development partnership they have undertaken with another country, which will be a learning experience for us working together but a very valuable one."
Mr Panetta is visiting New Zealand after a trip to Japan and China.
It follows the signing in June of the Washington Declaration on defence, an official stamp on a new era of Pacific co-operation and high-level dialogue between the US and New Zealand.
Commentators have questioned whether it will affect New Zealand's relationship with China.
Asked about that, Ambassador Xu said he was sure that New Zealand would not join any alliance with the United States against China, or any alliance with China against the United States.
"I attach a great appreciation to New Zealand's foreign policy; that is an independent foreign policy."
Mr Xu also commented on the tensions that have reignited between China and Japan over the disputed island known as Diaoyu to China and Senkaku to Japan.
He implied that New Zealand had an obligation to support China.
He said that in the 1943 Cairo Declaration between China, the US and Britain it was declared that all territories Japan had stolen from the Chinese should be restored.
It had been reiterated in the Potsdam Proclamation setting out the terms of the Japanese surrender.
In World War II New Zealand and China were allies, Mr Xu said.
"We share the same obligation to protect the outcome and the result of the Second World War."
China hoped the issue could be resolved peacefully.
"But how to resolve this issue peacefully is actually determined by the Japanese Government."
Mr McCully said he had not been lobbied on the issue but officials had been.
"We are familiar with the positions of both countries on the issue - and it is not the only difference of opinion on similar matters in the region - and we do take an interest in the positions being adopted by our friends.
"But we continue to emphasise the importance of accepted international protocols for dealing with these differences and in particular the United Nations Convention on the Law of the Sea."
It was important to stick with internationally accepted procedures for dealing with such matters, he said.
Mr Xu said economic and trade co-operation had skyrocketed since the the Free Trade Agreement between China and New Zealand was signed in 2008.
China was New Zealand's second largest trading partner, the largest source of imports, the largest source of foreign students in New Zealand and the fastest growing tourismmarket.
Asked if he believed Shanghai Pengxin had been fairly treated in its bid to buy the 16 Crafar farms from the receivers, Mr Xu said the New Zealand Government made "a very smart choice" in approving it.
He believed most people would see the mutual benefits of both countries.
"However, I would like to take this opportunity ... to give some friendly advice to our New Zealand friends to embrace Chinese investment in a much broader sense, in a much more welcome manner."
Fonterra had expanded its business to China and was benefiting from its investment there.
"Clearly I recognise that Fonterra in China is facing a much fairer and welcome playground than Pengxin in New Zealand."
