New Zealand paused the payments and would not resume them until the Cook Islands took "concrete steps" to restore trust, a spokesman for Foreign Minister Winston Peters said in a statement.
The self-governing Cook Islands, a country of 17,000 people, has a "free association" relationship with its former colonial ruler New Zealand, which provides budgetary assistance as well as help on foreign affairs and defence.
The Cook Islands caught New Zealand off guard in February when it signed a Comprehensive Strategic Partnership agreement with China covering deep-sea mining, regional cooperation and economic issues.
A spokesman for the foreign minister pointed to the "lack of consultation" surrounding the "agreements signed by the Cook Islands and China" as a reason for the aid pause.
"Trust and meaningful engagement are fundamental to free association," he said.
Asked about the dispute on Thursday, Beijing's foreign ministry said "China-Cook Islands cooperation does not target any third party" and "should not be interfered with".
"New Zealand and the Cook Islands are both important cooperative partners of China," ministry spokesman Guo Jiakun said at a regular press briefing.
The pause in funding comes as New Zealand's Prime Minister Christopher Luxon is scheduled to meet with Chinese President Xi Jinping in Beijing on Friday.
- Luxon to visit China -
New Zealand provided US$116 million (NZ$194 million) to the Cook Islands over the past three years, according to government figures.
It has paused a planned US$11 million development assistance payment for the next financial year.
"New Zealand will also not consider significant new funding until the Cook Islands Government takes concrete steps to repair the relationship and restore trust," Peters' spokesman said.
Peters told reporters on Thursday that the funding pause was not timed to coincide with Luxon's trip to China.
He said he discussed the country's concerns during a meeting with China's Foreign Minister Wang Yi earlier this year.
Cook Islands Prime Minister Mark Brown did not immediately respond to a request for comment.
He survived a no-confidence vote in February over the deal with China, blaming "misinformation" from New Zealand for destabilising his country.
"It becomes very clear this is not about consultation. This is about control," he said at the time.
Former Australian diplomat Mihai Sora said it was "not surprising that New Zealand has reacted in such a way".
"New Zealand obviously wants to repair its relationship with Cook Islands. It wants to block China from gaining increased strategic access to the Cook Islands, but also essentially to its immediate neighbourhood," the Lowy Institute analyst told AFP.
"But if Cook Islands pushes closer to China in a way that threatens New Zealand's national security, it's really not possible to have such intimate ties."
New Zealand also announced this year it would review aid to climate-threatened Pacific nation Kiribati, one of China's closest friends in the region.
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