The federal treasurer has quietly blocked a Chinese-linked investment fund from increasing its stake in a strategically crucial Australian rare earths producer, in another sign the government remains intent on building up trusted critical minerals supply chains.

Last year, Yuxiao Fund applied to the Foreign Investment Review Board to increase its stake in Northern Minerals Limited from just under 10 per cent to 19.9 per cent.

But Treasurer Jim Chalmers signed an order blocking the move on February 15 after the Foreign Investment Review Board recommended the application be turned down.

The ABC has been unable to reach Yuxiao Fund, and Northern Minerals did not respond to the ABC's request for comment.

But Northern Minerals Executive Chairman Nick Curtis told Reuters that the Singapore-registered fund is an investment vehicle for Chinese national Yuxiao Wu.

Reuters reported that Yuxiao Wu owns miners in Mozambique which supply lower-grade rare earths to China.

The decision once again highlights the sensitivities surrounding critical mineral supply chains, which are crucial to the renewable energy transition and remain dominated by China.

Rare earths are also a critical part of modern military technology and are used in communication equipment, stealth technology and precision-guided weapons.

Northern Minerals operates the Browns Range mine in Western Australia's east Kimberley and aims to become the first substantial producer of dysprosium — a key component used in electric vehicles — outside China.

Both the Albanese government and the Biden administration have been encouraging Australian companies to exploit local reserves of critical minerals.

The United States remains nervous that China could leverage its effective monopoly on rare earths if its ties with Washington further deteriorate, potentially starving Western companies or the US military of a crucial resource.