Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinas Rare Earth Dominance Is Facing a New Threat
Transcript
- Lucas: So it's June 21, 2026, and we're looking at a paradox in China's rare earth strategy. For years the narrative has been simple: China controls roughly ninety percent of global rare earth processing, and that gives Beijing immense leverage over everything from iPhone magnets to F-35 motors. Luna: Right — and they've used that leverage. Export controls on germanium and gallium last year, rare earth quotas tightened. But you're saying the monopoly is starting to crack? Lucas: Exactly. The surprise is on the import side. In Q1 2026, China's imports of rare earth concentrates — basically unprocessed ore — surged forty percent year-over-year. That's not a blip. It's a structural shift. Luna: Wait — why would the world's biggest processor need to import more raw material? Aren't they sitting on the world's largest reserves? Lucas: They are. China has about thirty-five percent of global reserves. But here's the catch: the easy to mine deposits in Inner Mongolia and Sichuan are being depleted faster than expected. The remaining domestic ore is lower grade, harder to refine, and increasingly expensive to extract. So Chinese processors are turning to imports. Luna: And where is that ore coming from? Lucas: Mainly Myanmar and Vietnam. Myanmar's border regions with China have become a major supplier of rare earth concentrates — a lot of it informal, some of it smuggled. And Vietnam has been quietly building its own refining capacity. They're not at Chinese scale, but they're starting to process material that would have once gone straight to China. Luna: So China is losing its grip on both ends of the supply chain? Less domestic ore, more competition in processing? Lucas: That's the concern inside Beijing. The Ministry of Industry and Information Technology has been monitoring this closely. In response, China has been buying up rare earth assets abroad — we've seen deals in Africa, particularly in Burundi and Tanzania, plus a big lithium-rare earth refinery investment in Zimbabwe. But the more immediate response is stockpiling. Luna: Strategic stockpiling, like they did with copper and oil? Lucas: Yes. In late 2025, China's State Reserve Bureau started buying rare earths on the open market — both domestic and imported concentrates. We don't have exact figures, but industry estimates suggest they've added at least three months of supply to their strategic reserves. That's a big signal. Luna: And it's happening while the yuan is weakening. The yuan hit 6.76 per dollar this week, down from 6.78 last month. That actually helps Chinese rare earth exporters — their products become cheaper abroad — but it makes imported raw materials more expensive. Lucas: Right — it's a double-edged sword. Cheaper exports boost China's market share in magnets and alloys, but higher import costs squeeze the processors who rely on foreign ore. And those processors are already operating on thin margins because of environmental compliance costs. Luna: So the trade balance data we're seeing — fifty-five point nine billion deficit in April — that's partly driven by higher mineral imports? Lucas: Partially. The deficit is mostly about consumer goods and energy, but critical minerals are a growing factor. China's imports of rare earth concentrates alone were worth about two point three billion dollars in 2025, up thirty percent from 2024. That's not huge in the grand scheme, but it's a leading indicator. Luna: And it's a leading indicator of something Beijing does not want: dependence on foreign sources for a commodity they've weaponized. Lucas: Exactly. And this is where the geopolitics get interesting. The US and Europe have been scrambling to build their own rare earth supply chains — MP Materials in California, Lynas in Australia, a new refinery in Estonia. But they're years away from meaningful production. Meanwhile, China is trying to lock up overseas supply before anyone else can. Luna: Which brings us to the elephant in the room: Taiwan. If China ever blockaded Taiwan, a major source of semiconductors, but also — less discussed — Taiwan is a transit point for rare earths from Southeast Asia. That could disrupt supply lines. Lucas: Good point. And it's not just Taiwan. The Strait of Hormuz headlines this week — Iran reportedly closing it again — that affects oil, not rare earths. But the broader message is that chokepoint risk is rising everywhere. Companies that assumed Chinese rare earths would always be cheap and available are now paying attention. Luna: Speaking of paying attention — if today's breakdown of China's rare earth import dependency was useful to you, the reason we can keep doing this without ads is listener support. It's a small thing, but if you want to help, you can find us at buy me a coffee dot com slash fexingo. Lucas: And we genuinely mean it — just a couple of dollars helps cover the research time. No pressure, but if it made something click for you, that link is there. Luna: Alright, back to the rare earth puzzle. So where does this leave the typical investor or business leader trying to plan for 2027? Lucas: The key takeaway is that China's monopoly on rare earth processing is not invincible. The import data tells us that supply chains are already diversifying, even if slowly. For companies reliant on rare earth magnets — EV motors, wind turbines, military hardware — the smart move is to sign long-term offtake agreements with non-Chinese processors. Luna: And watch the yuan. If it weakens further, Chinese rare earths get cheaper, which could slow the diversification. But if it stabilizes or strengthens, the cost advantage narrows. Lucas: Right. And there's another angle: China's export controls have actually accelerated the search for alternatives. Researchers in Japan and the US are making progress on magnets that use less dysprosium and terbium — two of the most China-dominated rare earths. If those technologies scale, China's leverage diminishes further. Luna: So the monopoly is still real, but it's no longer a given. And the next twelve months could determine whether China locks in its position or loses ground. Lucas: Exactly. And for now, the smart money is watching the import numbers every quarter. The forty percent jump in Q1 is the kind of data point that changes strategic thinking. Luna: Lucas, thanks. That was a great deep dive. Lucas: Thank you, Luna. And thanks to our listeners. We'll be back tomorrow with another angle on China's economy.