Speaking to reporters, Cao said the two sides had directed technical experts to press ahead with consultations over the hotline, but gave no timeline for when the link might be put into place.
Chinese state media said the proposed hotline would be the first such link between China's military and an outside power.
"We reached agreement on implementation of a direct telephone link between our two defence establishments," Gates said after Monday's talks.
During the meeting he said he had pressed China to be more transparent over its military ambitions, saying there were international concerns over the rising power of its armed forces.
|With 2.3 million members, China has the world's |
largest standing military [GALLO/GETTY]
Gates said he raised "the uncertainty over China's military modernisation and the need for greater transparency to allay international concerns".
While relations have warmed since a low in 2001, when a Chinese fighter crashed into a US spy plane, Washington remains concerned about China's military build-up.
China has reported double-digit increases in defence spending in recent years, and US intelligence officials say the real level of spending is much higher than officially stated.
According to Beijing, China's annual military spending rose 17.8 per cent this year to $45 billion.
But officials at the Pentagon believe China's military budget is as high as $125 billion a year and growing even faster.
Washington has also expressed concern over what it says is a lack of transparency in China's military programmes.
One recent cause of alarm was China's test of an anti-satellite weapon in January.
The test sparked warnings from the US and several other Western nations that China risked triggering a space arms race.
Washington has also expressed concern over China's alleged advances in cyber warfare, as well as its development of long range missiles capable of hitting US naval and air bases.
Gates is due to hold talks with Hu Jintao, the Chinese president, on Tuesday.