How China seized global domination of rare earth metals
And what this says about the Communist Party's willingness to use whatever means needed to achieve its strategic objectives.
China’s dominance of the world’s rare earth sector has emerged as one of its most potent weapons in the increasingly acrimonious trade war between Beijing and Washington.
Its disproportionate clout on the world’s rare earth market has enabled Beijing to effectively contend against US control of critical technologies - most notably silicon semi-conductors.
As pithily summed up by one Chinese pundit paraphrasing Deng Xiaoping - “the US has chips, China has rare earths.”
With a 70% share of global rare earth mining and more than 90% share of processing, China’s sector dominance is not just the product of happenstance or fortuitous natural resource endowments.
It’s instead the result of forty years of calculated policy decisions by Beijing’s governing elite, continuously mindful of the profound strategic significance of its rare earth assets.
This process involved major pivot steps in policy across the span of decades. It first encompassed the use of export incentives and foreign investment to drive the growth of sector in the late 20th century.
This was then followed by a sweeping restructuring of the market, putting the majority of capacity under the control of huge state-owned enterprises.
The rise of China’s rare earth sector also involved state support for scientific research, achieving key advances when it came to processing technologies.
This reduced costs and enabled China to achieve a dominant role in rare earth processing that complemented its copious deposits.
This briefing recounts China’s rise to global rare earth dominance over the past four decades - a saga which provides critical insights into the nature of China’s political economy since the start of the reform era.
It’s a journey that exemplifies the pivot-stepping pragmatism of China’s governing elite in the post-Mao period, and their willingness to adopt whatever economic policy tools are necessary - irrespective of ideological pedigree - to achieve their strategic objectives.
Reform and rapid expansion: 1985 - 2005
Deng Xiaoping - the paramount leader of China who spearheaded the nation’s economic reforms, is notorious for once having quipped that “the Middle East has oil, China has rare earths” (”中东有石油, 中国有稀土”).
Deng made the remark in the early 1990s, with reference to China’s prodigious deposits of rare earth minerals - currently estimated at around half of the world’s proven reserves.
The public statement from Deng serves to highlight Beijing’s keen awareness of the importance of rare earths as a strategic asset - an awareness that has endured at the echelon of Chinese elite policy-making for multiple decades.
It’s resulted in the adoption of different policies to expedite the development of the rare earths sector, as well as make it fully amenable to strategic control by the Chinese central government.
As early as the 1980s, rare earths were included in China’s broader reform process that involved the opening up of the economy to overseas trade and investment.
A key goal of China’s early reforms was the use of exports and inbound investment to obtain foreign exchange. Currency from abroad could then be used to purchase equipment and technology from other nations, enabling China’s domestic industries to catch up with the rest of the world.
This strategy was best embodied by the establishment of special economic zones in several Chinese cities at the start of the 1980s, the most renowned of which is no doubt the modern tech hub of Shenzhen.
Rare earths were an integral part of this strategy, with the 1980 “Interim Measures on the Export License System” including them within the scope of export license management.
China also sought foreign investment and technology from other nations - in particular Japan, in order to jump-start its rare earth mining and processing capabilities.
The chief tool for China to drive the early development of the rare earth sector, however, was the export tax rebate policy launched in 1985.
Beijing set the tax rebate rate at 13% for rare earth ores % and 17% for rare earth metals, spurring the development of capacity and production by upstream enterprise.
The rebates embodied the transformational nature of China’s early economic reforms in the 1980s.
On the one hand, they sought to offer incentives to self-interested market actors - a radical shift for a nation that previously aspired to Soviet-style central planning. On the other hand, they also drove China’s integration with the global economy - for another sharp departure from the closed policy of the late-Maoist era.
The export tax rebate policy rapidly proved to be highly effective in driving the rise of China’s rare earth sector, as well as an accompanying transformation in global supply chains for these critical minerals.
It contributed an average annual increase in China’s output of rare earth ores of 22% during the period from 1991 to 1998.
According to figures from the United States Geological Survey, from 1991 - 2004 China’s rare earth export volume surged from 8200 tons to 53,300 tons. China’s rare earth mining production went from 48% of the global total in 1994 to 95% in 2004.
During this period, a large volume of capital poured into rare earth extraction and processing that drove dramatic expansions in capacity.
This growth in Chinese supply also had the effect of putting downwards pressure on rare earth prices. Average rare earth export prices dropped from USD$12,500 per ton in 1991, to USD$9300 per ton by 2004.
The counterpart to the rise of China’s rare earth exports was a tremendous contraction in supply chains and shedding of capacity around the rest of the world. This served to further cement China’s leading role in the sector.
A signal event during this process was the closure of the Mountain Pass Rare Earth Mine in California in 2002, as it came under pressure from lower cost Chinese competition. The owner of Mountain Pass - Canadian mining company Molycorp, would subsequently file for bankruptcy in June 2015.
Clean-up and state control: 2006 - 2011
The unruly market forces unleashed by China’s reform and opening drove surging development of the rare earths sector, as they did across the rest of the country’s economy.
As with other sectors of the economy, however, rampant growth brought with it severe problems - most notably in the form of industrial pollution and environmental degradation. China’s rare earth sector also saw the flourishing of illegal mining operations beyond the purview of state regulation.
A key issue in this regard was “disorderly competition” and the unchecked expansion of supply, which resulted in declines for rare earth export prices. The export tax rebate stood accused of leading to overcapacity of rare earth production, as well as a decline in resource reserves.
It’s worth noting that Beijing continues to struggle with the issue of disorderly competition - as well as attendant overcapacity and price declines - in other sectors of the economy until the present. The issue is the key driver behind Xi Jinping’s current campaign against “involution” in the Chinese economy.
As a consequence of these issues in the early 2000s, reform of the rare earth sector became an urgent policy mission for Beijing during the first term of President Hu Jintao.
As early as 1999, Beijing began to implement an export quota system for the rare earth sector to rein in capacity and give support to prices.
A landmark event for the sector arrived in 2005, with the cancellation of the export tax rebate - the defining policy that had helped to drive the breakneck development of rare earths over the preceding two decades.
The Chinese government then began to step up regulation and control of the rare earth sector. It focused in particular on environmental pollution and the activities of black market operators, in key regions such as Inner Mongolia.
Most importantly, the Chinese government began to apply direct controls to the production and export of rare earths - a sharp reversal from the export tax rebates that sought to encourage offshore sales.
In 2006, the Ministry of Natural Resources began to draft and implement aggregate indices for rare earth extraction and supply volumes.
The following year, rare earth mining and processing were officially included in China’s state mandatory planning scheme. This was a move that ran contrary to the dismantling of China’s centrally planned economic system which reached its apogee in the 1990s under Premier Zhu Rongji.
In 2008, China’s customs authority also joined efforts to control the rare earth sector, launching a campaign against smuggling operations in order to more effectively stymie supply.
In a bid to deal with the rampant supply growth and plunging export prices, the rare earth export quota was cut from 65,600 tons to 30,300 tons during the period from 2005 - 2010.
The effectiveness of these export restrictions was undermined by widespread illegal mining operations, oftentimes in remote areas that were difficult to regulate.
Beijing’s crackdown nonetheless had a major impact on the global market and prices for rare earth minerals. From 2010 - 2011, rare earth export prices surged by over 500% in response to the imposition of stricter export quotas.
The supply restrictions and price spikes at the start of the 2010s had the effect of driving other nations to diversify their sources of rare earth minerals, in order to reduce their dependence upon China’s supply chain.
State-directed restructuring: 2011 - 2015
China’s ascent to becoming the world’s second largest economy in nominal terms was achieved by unleashing the productive energies of profit-seeking private enterprise.
Under its current system of political economy, however, Beijing remains intent upon keeping certain key strategic industries under the control of the government, by maintaining the dominance of large-scale state-owned companies.
These sectors include the media, education and finance - all of which have remained under firm state control throughout the entire reform era since the late 1970s.
With rare earths, however, the Chinese government has pursued a highly distinct strategy. It gave free rein to the development of the rare earth sector during the first two decades of the reform and opening era, leading to the proliferation of a large number of illegal mining operations.
Given the critical strategic importance of rare earth minerals, however, Beijing eventually decided to bring the national sector back under the remit of government control, once market forces had brought it to a condition of sufficient maturity.
This process began in 2011, with the restructuring of the sector into six large-scale state-owned enterprises under the control of the Chinese central government.
The creation of the big six rare earth SOEs
In May 2011, State Council issued the “Several Opinions on Expediting the Continued Healthy Development of the Rare Earths Sector” (国务院关于促进稀土行业持续健康发展的若干意见) marking the start of the sector’s reorganisation into control by large-scale government entities.
The first round of restructuring ran from 2011 to 2025, with the goal of achieving a “5+1” hierarchy of state-owned enterprises for the Chinese rare earths sector.
The “five” was a reference to China Minmetals, Chinalco, Guangdong Rare Earth Corp, China South Rare Earth Group and Xiamen Tungsten Group.
This cohort of companies would serve as the vehicles for the integration of rare earth resources and enterprises in the central and southern Chinese provinces of Jiangxi, Hunan, Guangdong, Fujian, Yunnan, Guangxi, Jiangsu, Shandong and Sichuan.
The “one” referred to China Northern Rare Earth Group, which would be entrusted the integration of rare earth resources and enterprises in Inner Mongolia and Gansu province.
This restructuring proceeded rapidly during the first half of the 2010s. By the end of 2015 the reorganisation of much of China’s rare earths sector into the six big conglomerates was basically complete.
These six companies had acquired 66 out of 67 rare earth mining licenses in China, and 77 out of 99 smelting and refining enterprises.
The one remaining mine and 22 other smelting and refining companies had already confirmed their plans for integration with other entities, or been included in plans for the removal of backwards capacity.
Expunging the “cancer” of illegal rare earths
The central government’s restructuring of the rare earth sector led to the consolidation of licit operations into six state-owned conglomerates.
China still grappled with the problem, however, of the illegal extraction of “black rare earths” (黑稀土) - a reference to rare earths extracted and processed outside the scope of mandatory state planning (国家指令性计划).
As a consequence of this issue, the “optimisation” of the industry structure had failed to translate into effective control by Beijing over rare earth capacity and export prices. State-owned media referred to the problem as a “cancer” disrupting supply levels.
The problem was especially acute for heavy rare earths in the south of China. These deposits were widely distributed - often in remote areas that were difficult to regulate. They also commanded higher prices, offering stronger incentives to illegal operators who were willing to flout the law to further reduce their costs.
According to industry association estimates, in 2015 - just as the domestic rare earth sector had been restructured into six large scale companies - domestic rare earth production quota stood at 105,000 tons, yet the supply of black rare earths was 168,000 tons.
In order to deal with the problem, China launched a campaign against rare earth smuggling and illegal supply from 2016 - 2018, with intensive crackdowns kicking off in 2017.
The campaign proved effective, with the production and export of black rare earths gradually diminishing as the end of the decade approached. Even as quotas for extraction and processing continually climbed, black rare earth volumes saw sharp declines that led to a contraction in overall supply.
Analysts point to stabilisation and optimisation of rare earth supply as one of the key outcomes of the crackdown on illegal rare earth mining.
Most importantly from the perspective of the Chinese government, the campaign increased the “controllability” (可控性) of China’s rare earth supplies.
2021 - The Establishment of China Rare Earth Group
By the start of the 2020s, the Chinese central government had dramatically improved its ability to control rare earth supplies, by restructuring the sector into six large-scale state-owned enterprises and bringing illegal mining to heel via a nationwide crackdown.
Beijing nonetheless sought greater consolidation of China’s rare earths sector - a move which would further enhance its ability to use it control for strategic purposes, just as trade tensions with the US heated up under the first Trump administration and the turmoil of the Covid pandemic.
In 2021, China launched a new round of rare earth industry restructuring and optimisation. In January of that year, the Ministry of Industry and Information Technology (MIIT) released the draft version of the “Rare Earth Management Regulations” (稀 土管理条例（征求意见稿)) for the solicitation of public opinions.
The opinions called for state management of total rare earth levels, the establishment of tracking and reserve mechanisms, and the severe punishment of illegal mining operations.
The most important reform would arrive in December, however, with Beijing’s decision to create a new state-owned giant called China Rare Earth Group.
The new company was created via the merger of some of the rare earth units of three of the big six SOEs that dominated the sector - including Chalco, China Minemetals and Ganzhou Rare Earth Group - as well as research companies China Iron & Steel Research Institute Group and Grinm Group Corporation.
Following its establishment, China Rare Earth Group would be directly administered by the State-owned Assets and Supervisory and Administration Commission (SASAC) - the organ of the State Council responsible for supervising China’s key government enterprises.
From the perspective of Beijing, the establishment of China Rare Earth Group marked the successful consolidation of China’s rare earth resources, as well as optimisation of the industry’s competitive structure.
By 2022, China Rare Earth Group accounted for 68% of the heavy rare earth extraction quota out of the first round of extraction quotas for the year, while Northern Rare Earth accounted for 67% of the quota for light rare earths.
State-driven technological progress
China’s competitive advantages in the rare earth sector are not confined solely to its natural resource endowments. Chinese companies have also managed to achieve an edge in the processing technologies that play a critical role in rare earth supply chains.
Rare earths were one of the very first areas where modern China sought to make technological strides - starting as early as the 1970s.
Physicist Xu Guangxian (徐光宪),(1920 - 2015), an academician of the Chinese Academy of Sciences and one of China’s most storied scientists, is esteemed as the “father of Chinese rare earths chemistry.”
Xu was not spared from suffering during the turmoil of the Cultural Revolution in the 1960s and 70s. Both Xu and his wife Gao Xiaoxia were sent to a labour camp from 1969 to 1972, after being accused of spying for the Nationalist party in Taiwan.
Upon returning to Peking University in 1972, Xu was asked to focus on the extraction of the rare earth element praseodymium.
He subsequently made key contributions towards the development of processes to separate rare earth elements. These culminated in the countercurrent extraction (or cascade extraction) process, greatly reducing the time and cost of materials extraction.
The development of this technology enabled China to achieve a major reduction in smelting and refining costs, to eventually obtain decisive advantages when it came to rare processing.
In 1986, Xu established the Research Centre of Rare Earth Chemistry, and in 1989 contributed to the founding of the State Key Laboratory of Rare Earth Materials Chemistry and Applications.
Since then Chinese research institutes - including Baotou Rare Earth Research Institute and Beijing’s General Research Institute for Nonferrous Metals, have achieved a string breakthroughs in extraction, refining and separation technologies.
China’s research efforts in the rare elements sphere began to accelerate after the turn of the century - and in the 2010s especially.
By 2018, China had 25,900 rare earth patents on record - a figure over double the US total of 9,800, as well as greater than the combined figure for Japan and the EU.
Over half of the patents filed by China dated from after 2011 - a strong sign of how research efforts accelerated in tandem with Beijing’s push to restructure the rare earths sector into domination by big state-owned firms.
This drive for technological advances - coinciding with greater control by the state -paid off in spades for China’s ability to influence the world’s rare earth market.
Figures from the International Energy Agency indicate that by 2023 China retained near monopoly control of rare earths processing, with a 92% share of the global market.
A strategic weapon forged over four decades
Deng’s foresight concerning the strategic importance of rare earths appears to have been vindicated in 2025, as the trade war with the US reaches a fresh peak, seven years following its launch during Trump’s first term in office.
Control of rare earths have emerged as Beijing’s most potent weapon of choice, following the intensification of trade tensions since Trump’s launch of Liberation Day tariffs on 2 April.
On 4 April - just two days after Liberation Day, Beijing announced exports restrictions for seven rare earth elements, as well as related compounds, metals and magnets.
This led to a precipitous drop in export levels in April and May, with EU and US automakers compelled to trim utilisation rates - or even temporarily shut factories, due to the scarcity of permanent magnets.
As Trump dialled back his protectionist stance, China again turned to rare earths to make corresponding concessions. On 7 June, the Ministry of Commerce signalled a gradual loosening of its restrictions on rare earth exports, stating that China was “conducting reviews of export licenses for relevant rare earth products.”
Trade tensions subsequently eased, and by September expectations emerged of a further thawing in relations.
The Madrid negotiations - held from 14 - 15 September, and the phone call between the China and US heads of state on 19 September, whetted hopes of improvements to relations between the two economic superpowers.
These hopes swiftly ran aground by late September, however, when the US Bureau of Industry and Security (BIS) expanded its trade blacklists against Chinese companies, prompting a furious response from Beijing.
China once again turned to rare earth export controls as its retaliatory weapon of choice.
On 9 October, the Chinese ministry of commerce and customs announced a sweeping expansion of its export controls for rare earth materials, technologies, and dual-use items, scheduled to come into effect on 8 November.
The announcement immediately sent shock waves through US capital markets, with the Dow Jones dropping 878 points and the Nasdaq composite falling 3.6% on 10 October.
US battery company Fluence Energy saw its share prices drop 12%, while Tesla posted a 5% decline, amidst concerns over their dependence of these companies on Chinese lithium batteries.
The Trump administration did not pull its punches either, responding to Beijing’s lateset round of rare earth restrictions by announcing a new 100% tariff against Chinese goods.
The impact of China’s rare earth restrictions on the US stock market - as well as the vehemence of Washington’s response - attest to the potency of Beijing’s rare earth playing card - an offensive talisman cultivated by a succession of political leaders over the course of more than a generation.
What the rise of Chinese rare earths tells us about Beijing
Outside observers are often inclined to give Beijing’s economic helmsmen too much credit when it comes to foresight and advanced planning - as though the early reform leaders were clairvoyant masterminds, who forged a multi-decade blueprint at the start of the 1980s to chart the meteoric rise of China’s economy.
This of course isn’t the case. To take Deng Xiaoping as an example - he was blown away by Japan’s wealth and technological sophistication during his visits at the end of the 1970s, because China’s leadership had remained largely oblivious to the advances of the Asian Tiger economies during the post-War era.
Major missteps were also made by Beijing following the start of the reform period - such as the proliferation of official corruption under China’s two-track system of the 1980s, that sought to bring market-based pricing to a Soviet-style economy.
Deng’s impatience for rapid price liberalisation also led to a shock inflationary spike at the end of the 1980s, which, in tandem with the aforementioned corruption, sparked the potentially fateful spread of political turmoil around China in 1989.
Rare earth metals, however, stand as one example of China’s earliest reform leaders possessing the foresight to discern the profound significance of a key economic sector across a distant time horizon.
As the heads of a single-party political system, China’s leaders were able to institute policies that would fully capitalise upon the strategic potential of this sector across the span of multiple decades.
The rare earths sector also serves as shining example of the rigorous pragmatism of China’s economic leaders from Deng Xiaoping onwards, and their willingness to employ measures from all segments of the ideological spectrum.
This made them willing and able to adopt policies running contrary to their official ideology (liberalisation via market incentives in the 1980s and 1990s), as well as the grain of the established reform program (reorganisation into large-scale SOEs in the 2010s) whenever it suited their greater strategic designs.