(adds Payne quotes in paragraphs 6,7)
* Australia offers Pacific billions in loans, grants
* Pacific policy aims at countering China-analysts
* China says two countries should not be seen as rivals
* Foreign Ministers meeting in Beijing billed as 'reset' of ties
By Philip Wen and Colin Packham
BEIJING/SYDNEY, Nov 8 (Reuters) - Beijing and Canberra should be cooperating in the South Pacific and not be cast as strategic rivals, China's top diplomat said on Thursday, after Australia launched a multi-billion dollar fund to counter China's rising influence in the region.
Standing alongside Australian Foreign Minister Marise Payne, Chinese State Councillor Wang Yi made the conciliatory remarks after a meeting in Beijing widely billed as a step toward re-setting bilateral ties after a lengthy diplomatic chill.
Wang said that he had agreed with Payne that the two countries could combine their respective strengths and embark on trilateral cooperation with Pacific island countries.
"We are not rivals, and we can absolutely become cooperation partners," Wang told reporters, describing the meeting as important after the recent "ups and downs" in the relationship.
Payne said the discussions were "valuable, full and candid".
"We've realistically acknowledged today that in a relationship as dynamic as ours ... there will be from time to time differences," she said later at a separate news briefing.
"But what is important about that is how we manage those and we are focused on managing them respectfully, mindful of the tremendous opportunities the relationship presents to both our nations."
Ties became strained late last year, when the previous Australian prime minister, Malcolm Turnbull, accused China of interfering in its domestic affairs. The two countries have also been vying for influence in sparsely populated Pacific island countries that control vast swathes of resource-rich ocean.
But even as his foreign minister visited Beijing, Prime Minister Scott Morrison characterised the Pacific as its domain while offering the region up to A$3 billion ($2.18 billion) in cheap infrastructure loans and grants.
"This is our patch, this is our part of the world," Morrison said in his most detailed foreign policy speech since becoming prime minister in August.
Speaking in Queensland, Morrison said Australia would invest in telecommunications, energy, transport and water projects in the region.
He also said Australia would also expand its diplomatic presence in the Pacific, posting staff to Palau, the Marshall Islands, French Polynesia, Niue and the Cook Islands.
There are also plans to strengthen Australia's defence and security ties with Pacific islands through joint exercises and training.
Morrison did not name China in the speech, but analysts said it was a clear response to China's spreading influence.
"Australia is reacting to what China is doing. Australia needs more tools to engage with the Pacific," said Jonathan Pryke, a Pacific Islands foreign policy expert with the Lowy Institute, an Australian think-tank.
China has spent $1.3 billion on concessionary loans and gifts since 2011 to become the Pacific's second-largest donor after Australia, stoking concern in the West that several tiny nations could end up overburdened and in debt to Beijing.
On Wednesday, Treasurer Josh Frydenberg said Australia would oppose a A$13 billion buyout of APA Group, Australia's biggest gas pipeline company, by Hong Kong's CK Group on grounds that it would be against the national interest.
While reiterating the government's stand on APA, Payne said Australia remained open to Chinese investment. Wang said Beijing welcomed that assurance.
Last December, Beijing took umbrage at Turnbull's comments and the subsequent introduction of legislation to counter foreign interference, which appeared to be directed in large part at China.
Prior to Payne's visit, China had unofficially suspended accepting visits by senior Australian ministers, and Chinese state media had carried numerous anti-Australian articles. ($1 = 1.3734 Australian dollars) (Editing by Simon Cameron-Moore)