Australia has stopped the sale of a major electricity distributor to state-owned Chinese companies on national security grounds, a senior government official said Thursday.

China's State Grid and Hong Kong's Cheung Kong Infrastructure had jointly bid on a 99-year lease for 50.4 per cent of Ausgrid, which provides electricity to New South Wales, the Australian state that includes the city of Sydney.

Treasurer Scott Morrison said the infrastructure investment was critical to the Australian economy but that national security interests needed to be considered.

"In particular, during the review process national security issues were identified in critical power and communications services that Ausgrid provides to businesses and governments," Morrison said.

"When it comes to foreign investment, particularly in an asset such as this, the national security issues are paramount," he told reporters in Brisbane.

The local New South Wales government was expecting the lease deal, which would have generated more than seven billion US dollars, to bankroll other rail, road and infrastructure projects.

"Obviously issues regarding national security are issues with the federal government," said Gladys Berejiklian, the New South Wales treasurer.

The government will continue pursuing the sale, Berejiklian said.

Chinese foreign investment from state-owned companies has become a touchy topic in Australia in recent years.

In April, Morrison blocked the sale of the country's largest private land holding to a Chinese-led consortium, saying it was not in the national interest. It covered 100,000 sq km of land across four states, out of six, in mainland Australia.

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