Is there a way to study Chinese up to proficiency level without doing a diploma from beginners? Also how does doing a diploma work? Do you have to do extra subjects or is chinese and your degree subjects spread out across 5 years?
Not in an Engineering degree there isn't, definitely not to proficiency. You would have to either do Engineering/Arts or Engineering + Diploma of Languages.
The Diploma is an extra year, it is spread out throughout your course though. For instance, year 1 semester 1 you would study Chinese #1, year 1 semester two you would study Chinese #2 and so on. You need the previous unit to study the next one so it kind of limits how many you can do at one time. It adds an extra 8 subjects/1 year to your university career.
Alternatively, as i mentioned, you could do a private Chinese course at a TAFE or private school.