Mr Hockey had just placed "infrastructure" on the G20 agenda, ahead of world leader's summit in Brisbane next month, and he knew that the region sorely needed the kind of investment that China could lead.

Moreover, successive Australian treasurers and their key bureaucrats had worked hard to assist China gain a rightful and proportionate say in existing financial institutions, like the World Bank, but those hopes had been killed by the US Congress.

And Mr Lou was offering tens of billions of yuan to meet Mr Hockey's multiple objectives, no questions asked.

Whatever encouragement Mr Hockey gave to Mr Lou's proposal for an Asia Infrastructure Investment Bank – some government sources believe he fell for a classic "ambush" – it is clear that China's adroit diplomats made the most of it.

Foreign Minister Julie Bishop quickly intervened to ensure Mr Hockey's enthusiasm was tempered by the scrutiny of an inter-governmental committee before Prime Minister Tony Abbott embarked on his visit to Tokyo, Beijing and Seoul in April this year.

Ms Bishop's caution about Chinese economic entities being used for geo-political objectives was partly validated on May 3, when one of China's giant oil companies parked a billion-dollar commercial oil rig in a highly disputed section of the South China Sea, backed by an armada of Chinese para-military and naval vessels, triggering violent encounters with Vietnam.

On the same day the chief economist of one of China's big banks, Xiang Songzuo, claimed that Australia had been discussing the project with top Chinese officials and was likely to contribute both capital and knowhow, according to Emerging Market, a magazine published by the Japanese-led Asian Development Bank. "The aim is partly to undermine an institution that is dominated by Japan and the United States," said Mr Xiang, referring explicitly to the Asian Bank.

Mr Xiang does not represent official China but his comments struck a nerve in Canberra, in light of China's relentless moves to undermine Japan and forcefully press territorial claims against its neighbours.

Prime Minister Tony Abbott broke the ministerial deadlock at last week's National Security Committee meeting by shifting his weight behind Ms Bishop, despite opposition from Mr Hockey and Trade Minister Andrew Robb.

He made his views clear too late, after a five-month foreign policy diversion to the Ukraine and the Middle East, and the public presentation of this seminal question about Australia's place in Asia has been woeful.

But it would be wrong to assume Australia has reflexively sunk an otherwise worthy project in response to American pressure – or that the questions at hand could be neatly solved.

"The door's not shut, it's a two-stage process, the first stage involves the memorandum of understanding and the second stage is to negotiate the articles of association, when more details would emerge," said a well-placed government source. "If the decision was driven by American political pressure we would have said 'no, never'."