A security expert says the blocking of a Chinese-backed company from increasing its share in a producer of heavy rare earth minerals will help mitigate the risk of Chinese coercion.

Treasurer Jim Chalmers has blocked Yuxiao Fund from increasing its ownership in Northern Minerals from 9.9 per cent to 19.9 per cent.

Australian National University’s John Blaxland says the decision threw up a real challenge for Australia, which has been a mainstay supplier to China of unprocessed minerals, especially lithium which is used in batteries.

Prof Blaxland said Australia needed to find the right balance between continuing to work on a diplomatic thaw with China while supporting the United States’ sterner approach to its trading relationship with Beijing.

“The US is making it harder for China to operate with impunity by monopolising markets of critical materials,” he told AAP.

The professor said the decision worked towards “mitigating risks of Chinese domination”, with Australia becoming vulnerable to exploitation and political manipulation if it relied too heavily on China.

“There appears to be an accentuated nervousness in Beijing about the direction Australia will take in light of the heightened resistance to Chinese plans from Washington,” he added.

“It’s conceivable China will find alternative sources but this is playing a bigger phenomenon, which reflects the higher sense of contestation at play.”

Dr Chalmers said he made the decision based on the advice of the Foreign Investment Review Board.

“It’s consistent with other decisions taken by other governments in the past,” he told reporters in Canberra on Wednesday.

“Beyond that, I don’t intend to comment.”

Northern Minerals owns the Browns Range mine in northern Western Australia, which the company hopes to turn into the first significant producer of dysprosium – used in control rods in nuclear reactors, magnets and other industrial applications – outside China.

Opposition Leader Peter Dutton said foreign investment needed to be in the national interest.

“The treasurer at the time, Josh Frydenberg, made decisions in relation to a number of projects that didn’t proceed,” Mr Dutton said.

“That was based on advice from (security) agencies, from treasury (and) defence.

“Governments do have to make tough decisions and act in our country’s best interests and we’ll support the government where they do that.”

The foreign investment board assesses the risk of foreign investment to national security.

“Foreign investment carries risks related to the potential access and control investors may obtain over organisations and assets,” the board’s guidance note says.

Prime Minister Anthony Albanese flagged keeping more critical minerals, like the lithium used in battery production, onshore to not only boost the domestic manufacturing sector but also safeguard Australia’s national interests.

“That’s part of the vision of protecting our national economy going forward. We should be making so many more things here in order to protect our national sovereignty,” he said last week.

The Singapore-registered Yuxiao Fund is an investment vehicle of Chinese national Yuxiao Wu, who also has interests in Mozambique mines that supply lower-grade rare earths to China, Northern Minerals executive chairman Nick Curtis told Reuters.

Mr Curtis said Mr Wu invested in Northern Minerals for financial reasons as opposed to simply supplying China with rare earths.

– AAP