China's efforts to gain a greater stake in Australia's resource industry suffered a new setback on Thursday when a Chinese miner dropped a $400 million bid for a controlling stake in an Australian rare earths miner.

Earlier on Thursday, the Australian defense department rejected a separate Chinese investment in an outback mining venture, saying it threatened national security.

China's latest failed attempt to gain a larger slice of Australia's raw materials will upset the already strained ties between Canberra and Bejing.

China is Australia's biggest export market, with trade worth $53 billion last year, but ties soured in August when China arrested an Australian mining executive and Canberra granted a visa to an exiled leader of China's Muslim Uighur minority.

China Nonferrous Metal Mining (Group) Co Ltd terminated its bid for Lynas Corp, owner of the world's largest undeveloped deposit of rare earths, citing stiff conditions imposed by Australia's Foreign Investment Review Board.

The board had demanded CNMC cut its ownership to below 50 percent and take a clear minority of board seats in Lynas.

As a result of additional undertakings recently sought by the Australian Foreign Investment Review Board, CNMC has terminated the CNMC transaction, it said.

BROAD RESISTANCE

There is strong public and political opposition in Australia to China's moves to gain a greater hold of its resource industry.

I don't think anyone could reasonably say FIRB is anti-foreign investment. I think FIRB has been too generous in the past, said Australian Independent Senator Nick Xenophon.

Xenophon has argued for Australia to keep ownership and control of its natural resources.

It's reasonable to assume that we feel disappointed in the government's position, Lynas Executive Chairman Nicholas Curtis told Reuters from Sydney.

I don't fully understand commercially the difference between 51.6 percent and 49 percent position. You still have significant control of the company.

Australia's Defense Department said on Thursday that it would not support a proposed joint venture between Wugang Australia Resources, a wholly owned unit of Chinese state-owned Wuhan Iron and Steel, and Australia's Western Plains Resources.

The proposed deal would have seen Chinese magnetite resource investment inside the outback Woomera missile range, used as a weapons-testing ground by the military and Australian allies.

The military's lack of support means there is virtually no chance that approval will be given.

SECURITY ISSUE

Australian Defense Minister John Faulkner said the defense department's rejection of the deal had nothing to do with China, but was purely a security issue.

The Woomera test range is a significant contributor to Australia's defense capability, and that of our allies, and that's the focus that defense brings to bear on these issues, he said.

Both decisions come at a time of strained diplomatic ties between Canberra and Beijing after an Australian executive working for Anglo-Australian miner Rio Tinto was arrested in China and accused of commercial spying.

For a long time, China has had an open policy when it comes to foreign companies investing here. We hope other governments can take the same position when it comes to Chinese firms, Chinese Foreign Ministry spokeswoman Jiang Yu said on Thursday.

China's government became upset at the failure this year of a $19.5 billion tie-up between state-owned metals firm Chinalco and Rio Tinto after Rio walked away from the deal.

In April, Australian Treasurer Wayne Swan rejected Chinese state-owned firm Minmetals' $2.26 billion bid for debt-stressed OZ Minerals on national security grounds, saying the firm's main mine lay too close to Woomera. Australia finally approved a revised deal whereby Minmetals would buy OZ Minerals' other mines.

($1=1.153 Australian Dollar)

(Editing by Michael Perry and Jan Dahinten)

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