Shares in rare earths explorer Arafura Resources Ltd fell after a major Chinese shareholder said it would allow its stake to be diluted under Arafura's $90 million capital raising.

Arafura shares were down 10 cents, or 7.22 per cent, at $1.285 at 1518 AEDT.

Arafura last week placed 75 million shares at $1.20 each, raising $90 million to advance its Nolans project in the Northern Territory to the project financing stage.

It also invited East China Exploration & Development Bureau (ECE) to spend $25.9 million subscribing for extra shares to keep its stake in Arafura at 22.17 per cent.

The company said in a statement on Tuesday that ECE had notified it would not take up the offer to acquire Arafura shares at the placement price, meaning it will end up with an interest in Arafura of 17.59 per cent.

Nolans is expected to begin production in 2013.