SYDNEY – Australia's government has blocked a Chinese investor from raising its stake in a rare earths mining company on the advice of the Foreign Investment Review Board, Treasurer Jim Chalmers said on Wednesday.

Reuters first reported on Tuesday that Chalmers had blocked Yuxiao Fund, which is the Singapore-registered private company of Chinese mining investor Yuxiao Wu, from raising its ownership of Northern Minerals to 19.9% from 9.92%.

A government register showed Chalmers signed a prevention order on February 15, and Northern Minerals executive director Nick Curtis told Reuters the decision was based on "national interest".

Northern Minerals plans to become the first significant world producer of dysprosium outside China, which controls 94% of supply. Dysprosium is a key component for magnets for electric vehicles.

Yuxiao Fund is Northern Minerals largest shareholder, joining the register 18 months ago. Wu has significant mining businesses in Mozambique and is the dominant supplier to China for a lower grade rare earth, Curtis said.

"I made that decision based on the advice of the Foreign Investment Review Board, and consistent with other decisions taken by other governments in the past," Chalmers told reporters on Wednesday.

The board is required to screen foreign investment for the national interest, and Chalmers flagged in a speech in November that Australia, the world's top lithium supplier and a major producer of rare earths, would become more selective about who it lets invest in its critical minerals industry.

Opposition leader Peter Dutton said his party supported the decision, and the previous Liberal government had changed the foreign investment rules to screen for national interest and blocked some investments based on advice from the board and intelligence agencies.

Australia is the biggest supplier of iron ore to China, but has said it wants to diversify its partnerships for the supply and processing of rare earths.

Australia formed a Minerals Security Partnership in July with the United States and its security allies Japan, Korea, Canada and the United Kingdom, as well as several European nations.

Australian Strategic Policy Institute Executive Director Justin Bassi, a national security adviser to the previous government, said the board's recent decision to approve a Chinese investment in iron ore, and block the acquisition of a rare earth miner, showed the screening system was working to "ensure economic drivers do not override national security and sovereignty priorities".

"Rare earths are key inputs to many forms of critical technologies, including those central to defence," he said.

China previously criticised Australia for blocking Chinese investment on national security grounds, saying this contributed to a years-long diplomatic freeze. Relations between the two countries are improving.

Assistant Trade Minister Tim Ayres said on Wednesday Australia wanted to stabilise the relationship with China but there are "some difficult structural challenges there".

"The policy of the government has really not changed in terms of our approach to China, from the last government to this government," he said.

"I want to see more evidence of Australian imports being allowed back into China," he added.