There is an assumption in international relations literature that junior allies must choose between supporting a dominant global alliance partner and engaging with a rising power. Yet, Australian policy-makers have paradoxically managed to deepen Sino-Australian relations despite their bilateral alliance with the United States. They have developed a discrete China policy on the assumption that they could persuade Washington to accept it over time. They reasoned that this outcome was more likely if Australia used diplomacy to facilitate Sino-American cooperation and to develop an Australian China policy non-prejudicial to ANZUS. This article explores how this 'diplomatic formula' supported expansion of Sino-Australian relations under the Whitlam, Hawke, and Howard Governments. It explains Australia's intra-alliance influence and paradoxical foreign policy behavior and contributes to understanding the dynamics of asymmetric alliances during power transition.