ONE of China's biggest textile processors, Shandong Ruyi, has outlaid a substantial investment into the Australian ultrafine wool industry.

This follows news last week the company signed a Memorandum of Understanding with the Australian Superfine Wool Growers Association in a deal which will see Australian ultrafine wool being used by the company.

This week, Shandong Ruyi took their Australian ties one step closer by entering into a 10-year arrangement with Jema Genetics, Benalla, to develop a significant ultrafine sheep flock.

Jema Genetics chairman Ian Gill said the deal was a major coup for Australian ultrafine growers.

"Shandong Ruyi want to shore-up production and guarantee wool supplies," he said.

Mr Gill said a breeding program would now be developed, in conjunction with Deakin University, Geelong.

Late in 2011, the Chinese processor purchased historic Victorian property Larundel, located via Elaine - where the breeding program is planned to take place.

"The deal initially came about because we approached the company to sell them our Jemala Knitwear range, but it has developed into this science collaboration now - where we will be breeding the sheep," he said.

"Our role now is to stock the property and get everything started."

Although Shandong Ruyi has specified they would like a 1000-strong ultrafine flock on Larundel, Mr Gill said the property was capable of carrying more.

He said the collaboration, which will be between Jema Genetics, Deakin University and two Chinese universities, would enhance the Australian ultrafine Merino gene pool.

"This deal will go a long way in stabilising supply and creating new markets for Australian wool," he said.

"At present the money being offered for ultrafine wool is way below the cost of production."

The news comes hot on the heels of State farming organisations calling for the Federal Government to tighten its laws on foreign investment.

The review into foreign investment by the Australian Bureau of Agricultural and Resource Economics (ABARES) was released last week, but did not result in a reduction of the $231 million threshold for Foreign Investment Review Board (FIRB) scrutiny.