Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Is Stockpiling Rare Earths Beyond Its Borders
Transcript
- Lucas: So it's June 19, 2026, and the yuan is trading at 6.76 against the dollar — that's a fresh low for the year. But there's a quieter story underneath that number that I think tells us more about where Beijing is really focusing its economic firepower. Luna: Let me guess — rare earths? Lucas: Exactly. Because while everyone's watching the currency or the trade balance, Chinese state-backed companies have been quietly signing agreements to buy rare earth mining assets outside China. And I'm not talking about small pilot projects. Luna: How much are we talking? Lucas: Well, the most recent one that got finalized last week — a consortium led by China Minmetals and a provincial state-owned enterprise from Jiangxi — agreed to acquire a controlling stake in a rare earth project in Burundi for about 1.2 billion dollars. That's a big number for a country with a GDP of barely 3 billion. Luna: Burundi — that's in East Africa, right? Not exactly the first place you think of for rare earths. Lucas: Right. Most people associate rare earths with China's own Inner Mongolia or with Myanmar. But here's the thing — China's domestic reserves are actually not that large relative to global totals. It's about 35 percent of known reserves. What China has is processing dominance — it refines roughly 60 percent of the world's rare earths. Luna: So the strategy is to secure the raw material outside China, then bring it back to Chinese refineries? Lucas: That's the thesis. And it's not just Burundi. Over the past eighteen months, Chinese firms have struck deals in Tanzania, in Angola, in Brazil, and even in Greenland — although that one stalled because of local political pushback. The pattern is consistent: they're buying undeveloped deposits in countries that need infrastructure investment. Luna: And what does Beijing get out of it? Beyond just supply security. Lucas: Two things. First, it reduces dependency on its own mines, which are getting harder to operate — environmental regulations have tightened, and some older mines are running low on high-grade ore. Second, it gives China leverage in trade negotiations. If you control the processing and you're diversifying your mining sources, you're less vulnerable to any single country's export restrictions. Luna: But doesn't the US and Europe also have rare earth projects they're trying to fast-track? Lucas: They do. The US has the Mountain Pass mine in California — which was actually owned by a Chinese company until 2017. Europe is backing projects in Sweden and Portugal. But here's the timeline problem: most of those projects won't produce meaningful quantities until at least 2029 or 2030. Meanwhile, Chinese companies are moving now, with capital and with construction crews. Luna: So they're essentially buying a multi-year head start. Lucas: Exactly. And they're using the current weakness in the yuan to their advantage. When the yuan is lower, it makes their exports cheaper, but it also makes foreign assets cheaper in yuan terms. A 1.2 billion dollar mine that cost them roughly 8.1 billion yuan last year — at today's exchange rate, that's about 8.1 billion — wait, actually at 6.76 it's still around 8.1 billion, but the point is the currency move doesn't hurt them because they're converting dollars from their export earnings. Luna: Right, they have plenty of dollars from the trade surplus. Which we just saw hit record levels in April, by the way — 55.9 billion dollar surplus. Lucas: That's the fuel. And I think this is the angle that gets missed in the typical 'yuan weakening bad' narrative. For a country with a massive trade surplus and a desire to lock up strategic resources, a weaker currency actually helps you buy foreign assets on the cheap. Luna: But there's a risk, right? If the assets are in countries with unstable governments — like Burundi — you're taking on political risk that you can't hedge with a currency derivative. Lucas: Absolutely. And that's where Chinese state-owned enterprises have a different risk appetite than Western mining companies. They can accept a longer payback period and they often bring infrastructure — roads, power plants — as part of the deal. It's the classic 'resources for infrastructure' swap that China has used in Africa for decades. But rare earths are more geopolitically sensitive than copper or iron ore. Luna: Because they go into everything from iPhones to F-35 fighter jets. Lucas: Exactly. And that's why the US and Europe are watching these deals so closely. Last month, the US Treasury Department flagged Chinese rare earth acquisitions as a potential national security concern — though they didn't name specific transactions. But the tools to block them are limited, especially when the seller is a small African country that needs the investment. Luna: Speaking of which — I've been reading about the new export controls China just announced on rare earth processing technology. That seems related. Lucas: Very much so. In late May, Beijing added several rare earth separation and smelting technologies to its export control list. So now, even if a foreign company builds a rare earth processing plant, they can't easily buy the Chinese equipment or licenses needed to run it. It's a way to protect the processing monopoly while simultaneously securing raw materials abroad. Luna: So they're squeezing from both ends — control the technology, control the upstream supply. Lucas: That's the strategy. And it's working in the sense that global rare earth prices have been relatively stable this year, around 85 dollars per kilogram for neodymium oxide, which is actually down from 2021 peaks. So there's no immediate shortage. But the long-term picture is one where China's dominance becomes even more entrenched. Luna: I want to circle back to the Burundi deal for a second. Who's the actual Chinese entity behind it? You said a consortium. Lucas: The lead is China Minmetals, which is a state-owned metals and minerals giant. They're joined by a subsidiary of the Jiangxi provincial government — Jiangxi is the province that produces most of China's heavy rare earths domestically. So they have both technical expertise and government backing. The Burundian project is called Gakara, and it was previously owned by an Australian company called Rainbow Rare Earths. The Chinese consortium bought out Rainbow's stake. Luna: And what's the timeline? When does production start? Lucas: They're aiming for 2028, with an initial output of about 5,000 tons of rare earth oxide per year. To put that in perspective, global production is around 300,000 tons annually. So it's not a game-changer in volume, but it's significant because it's heavy rare earths — the kind used in permanent magnets for EVs and wind turbines. Luna: And heavy rare earths are the ones where China's domestic supply is most constrained, right? Lucas: Precisely. Light rare earths — lanthanum, cerium — are more abundant. But dysprosium, terbium, those are the critical ones. China has about 40 percent of global heavy rare earth reserves, but it's consuming them fast. Buying a project like Gakara is insurance. Luna: Let me ask a broader question. If you're an investor looking at Chinese equities — say, the FXI or KWEB — does this rare earth strategy matter for stock prices? Lucas: I think it matters indirectly. The FXI is down about 3 percent over the past five days, and a lot of that is macro — yuan weakness, trade tensions. But the companies involved in these rare earth acquisitions, like Minmetals — they're not publicly traded in the US. They're state-owned. So the direct equity exposure is limited. However, the broader narrative that China is securing critical supply chains does support the long-term case for Chinese industrials and materials. Luna: But it also increases geopolitical friction, which is a headwind for Chinese tech stocks like Alibaba or Baidu. Lucas: Right. It's a double-edged sword. On one hand, resource security helps China's manufacturing base. On the other, it invites more scrutiny and potential sanctions. The US has already discussed restricting Chinese investment in critical minerals in allied countries. So it's not a clean win. Luna: You know, listening to this, I'm reminded of something similar in the oil market — how China bought up oil fields in Africa and Canada in the 2000s. Is this the same playbook? Lucas: It's very similar, but rare earths are more concentrated. With oil, there are many producers: Saudi Arabia, Russia, the US, etc. With rare earths, China is already the dominant processor. So these overseas mines are about reinforcing an existing monopoly, not creating a new one. Luna: And that makes it harder for competitors to break in, because even if they find a deposit, they still need Chinese processing technology. Lucas: Exactly. And the export controls on that technology just raise the bar further. So I think over the next five years, we're going to see more of these offshore acquisitions, especially in Africa and South America. And each one will trigger more debate in Washington and Brussels about how to respond. Luna: I want to shift slightly to something you mentioned earlier — the role of the yuan. We've seen it weaken from around 6.4 a year ago to 6.76 today. How much of that is due to these capital outflows for resource acquisitions? Lucas: It's a factor, but not the main one. The bigger drivers are interest rate differentials — the Fed is still at 5.25 percent while the PBOC has been cutting rates — and the strong dollar index, which is at 119.5. But outflows for overseas investment do add downward pressure. In the first quarter of 2026, China's outbound direct investment in mining was up 22 percent year-over-year. So it's a meaningful flow. Luna: And the PBOC seems okay with that, as long as it doesn't become a rout. Lucas: They've been managing it with a steady hand — setting the daily fixing slightly weaker each day, but not allowing a sharp break. The message seems to be: we won't defend a specific level, but we won't let it trigger a crisis of confidence either. Luna: If walking through the economy with us has made something click, or you just value having a show that digs into these angles without ads, listener support is what makes that possible. A couple of dollars a month genuinely helps keep the podcast running — buy me a coffee dot com slash fexingo. Lucas: Yeah, and it's the simplest way to say 'keep going.' Buy me a coffee dot com slash fexingo. Really appreciate the ones who already do. Luna: Alright, back to rare earths. So if I'm a policymaker in the EU, what's my best countermove? Lucas: I think the most effective response is to accelerate funding for domestic processing capacity, not just mining. The US is trying with the Defense Production Act — they've awarded 35 million dollars to a rare earth processor in Texas. But that's tiny compared to what China spends. You need an order of magnitude increase. Luna: And you need to make it easier to permit mines. That's the bottleneck in the US and Europe. Lucas: Absolutely. The Mountain Pass mine took years to reopen after it was shuttered. And there's a deposit in Norway that's been known for a decade but still isn't producing. So while China moves fast, the West is stuck in permitting and environmental review. That's a structural disadvantage. Luna: Any sign that the Chinese are worried about a backlash? I mean, if countries start nationalizing these assets... Lucas: That's always a risk. But China typically structures these deals so that the host country retains a minority stake, and they often include clauses that protect against expropriation. Plus, they lend money to the government, so there's a financial tie. It's not foolproof, but it's worked in most cases. Luna: So the bottom line: China is using its trade surplus and a weaker yuan to buy up rare earth assets abroad, reinforcing its processing monopoly, while the West tries to catch up. Lucas: That's the story. And the numbers we have today — the yuan at 6.76, the trade surplus at 55.9 billion, the new export controls — all point in the same direction. This is a long-term strategic play, and it's already reshaping the global supply chain for critical minerals. Luna: Alright, that's a great angle for today. Lucas, thanks for walking through it. Lucas: Thanks, Luna. We'll be back next time with another look at what's moving China's economy.