The New South Wales (NSW) state government would prefer Australian businesses tendering for 4 billion Australian dollars (3.2 billion U.S. dollars) worth of government goods and services contracts, and the Premier Nathan Rees said on Monday the move was not a ban on China.
"This is not about China or any one nation, except Australia," Rees told reporters.
"It's about protecting Australian jobs through a difficult period," he said.
Unions welcomed the decision while Federal Foreign Minister Stephen Smith said any local procurement policy would have to be consistent with Australia's obligations to the World Trade Organization.
"This is not the time for Australia to retreat to protectionism, " Smith told Sky News.
NSW Treasurer Eric Roozendaal said the state government was still working within all the normal rules in relation to free trade agreements with overseas partners.
He said about 500,000 small and medium businesses could benefit from the state government's policy.
"We're not banning any imports. Let's be very clear, we're not putting up any trade walls," Roozendaal said.
"What we're saying is that we will use our spending strength when people are bidding for tenders."