China's State Council, or cabinet, issued the first rules on overseas investment by Chinese companies on Friday.

A new banned list includes casinos and defence technology, while overseas property development and hotels are classified as "restricted".

Chinese companies bought 38 per cent of all the residential property development sites sold in Australia last year, spending $2.4 billion, according to a Knight Frank report this year.

But China's National Development and Reform Commission declared on Friday that the property sector was "not the real economy" and companies investing overseas in real estate could be harming China's financial stability by increasing capital outflows.

The commission has labelled the overseas buying spree by China's biggest private companies in recent years as "irrational".

Companies that violate the foreign investment rules would be punished, the State Council statement said.

The average size of property development sites sold to Chinese companies in Australia last year was 21,045 square metres, an 18-fold increase from four years ago, according to Knight Frank's January report.

Chinese regulators had recently put the four biggest Chinese offshore private investors, HNA, Dalian Wanda, Fosun International and Anbang under greater scrutiny.

But Friday's rules signal for the first time the crackdown on overseas property development and hotel purchases would extend beyond these big four. Film industry, sports and entertainment investments are also now classified as "restricted" investments.

Dalian Wanda a fortnight ago began restructuring its business, which includes two $1 billion Australian apartment projects at Circular Quay in Sydney and the Gold Coast, plus the Hoyts cinema chain.

HNA has a stake in Virgin Australia, and a convention centre in Victoria, and has indicated it will continue to invest in airports and airlines overseas that have synergy with its core business, Hainan Airlines.

But there are many other Chinese companies active in the Australian property and hotel market.

Dahua Group last year spent $347 million in Melbourne and $400 million in Sydney to buy multiple suburban sites to develop as master planned estates.

Shanghai-based Dahua had made an unsuccessful billion-dollar unsolicited bid to the NSW government to redevelop the Sydney Fish Markets in 2015.

Greenland Group and Country Garden also have major Australian property projects. All three companies have real estate as their core business in Shanghai, and it is unclear how the new restriction on offshore property development will impact them.

The State Council said China will instead encourage companies to invest in projects that contribute infrastructure to its hallmark foreign police, the Belt and Road Initiative, which is seeking to build new rail and shipping links for trade.

Australia hasn't signed a Belt and Road memorandum of understanding with China.

Australian Trade Minister Steve Ciobo said this year the Free Trade Agreement with China meant bilateral trade was already developing well outside of the BRI.

Minster of trade, tourism and investment Steven Ciobo says trade links are already developing. Photo: Sanghee Liu

The new rules encourage prudent investments in oil and gas exploration, minerals and energy, areas where Chinese companies have traditionally and continue to invest in Australia.

Agriculture and fisheries investment is also given the green light, as is joint investment with foreign companies in technology and advanced manufacturing.

The official China Daily reported: "Officials should guide overseas investments according to different categories, providing support to those on the encouraged list, offering tips to those on the restricted list, while strictly managing those on the banned list."

Chinese outbound investment fell 44 per cent in the first seven months of 2017 as the Chinese government began cracking down on capital flight, and criticised Chinese companies buying trophy assets such as European football clubs, iconic hotels such as Club Med, and Hollywood studios.