China’s Rare Earth Leverage and Why It Matters

Since the US operation in Venezuela at the beginning of 2026, many investors have been waiting for China’s response. That attention is well placed. China imported more than two-thirds of Venezuela’s oil and has invested an estimated US$50 billion into the country over time.

So what could China realistically counter with?

The highest-probability response is export restrictions. On the surface, this may sound lackluster, but it is anything but. Export controls allow Beijing to apply pressure in a way that is targeted, deniable, and difficult to escalate against.

In this article, we explore why these restrictions matter, and why they are increasingly likely to be used again as a strategic tool in future geopolitical disputes.

The Developing Playbook

During 2025, China twice moved to restrict exports of rare earth elements. Each episode followed a familiar pattern. An abrupt policy announcement is followed by a surge in media attention, a wave of confident commentary claiming rare earths are not truly rare, and then a gradual easing of tensions before material economic damage occurs.

What matters less is the detail of each individual incident and more the broader trend that is emerging.

China is increasingly willing, and able, to use its dominance in rare earth supply chains as leverage in trade and geopolitical disputes. This represents a meaningful shift from even five years ago. During the 2019-2020 US-China trade tensions, Beijing repeatedly threatened to restrict rare earth exports but never acted. Today, the strategic assessment appears different.

China has accumulated structural leverage in this part of the global economy, and it is now prepared to use it.

For long-term investors, this is not primarily a story about short-term supply shocks. It is about the durability of global supply chains, the practical limits of reshoring, and why certain strategic dependencies are far more difficult to unwind than headlines suggest.

Rare Earths Are Scarce Where It Counts

It is technically correct that rare earth elements exist throughout the Earth’s crust. However, this point is often misunderstood.

For a rare earth deposit to be economically viable, two conditions must be met.

1. The concentration of rare earths must be significantly higher than the global average.

2. The project must make commercial sense once infrastructure requirements, such as environmental regulation, financing costs, and mine life are taken into account.

Deposits that meet both criteria are genuinely scarce. Australia for example has many deposits that meet #1 but fall very short of #2, particularly due to our environmental regulator.

This scarcity is reflected in global production. Just five mines account for the vast majority of global output. Three are located in China, one is in Australia at Mount Weld, WA, and one is in California. Together, they produce roughly 85 percent of the world’s rare earth supply by weight.

Even within that small group, production is highly uneven. While the Mountain Pass mine in the United States was once a dominant global supplier during the Cold War, Chinese production overtook it in the late twentieth century. By the 2010s, Mountain Pass output had fallen to zero. Despite renewed investment and government support, the US still accounts for only a modest share of global rare earth production today.

Finding rare earth deposits that can be mined at scale, profitably, and within modern regulatory frameworks remains extremely difficult.

Not All Rare Earths Are the Same

The complexity increases further when looking beneath the headline category of rare earths.

Rare earth elements are typically divided into light rare earth elements and heavy rare earth elements. While most deposits contain both, the proportions vary dramatically depending on the geology. This distinction matters because different elements perform different functions, and not all mines provide access to the same capabilities.

Light rare earth elements such as neodymium and praseodymium are critical inputs for high-strength magnets used in electric vehicles, wind turbines, robotics, and industrial automation. These magnets underpin much of the global electrification and automation trend.

Heavy rare earth elements, including dysprosium and terbium, play a more specialised but equally critical role. They allow magnets to operate under higher temperatures and greater mechanical stress. Without them, many advanced electronics, defence systems, and high-performance motors cannot function reliably.

This is where the strategic imbalance becomes most pronounced. While non-Chinese producers can supply meaningful volumes of light rare earths, China controls almost the entire global supply of heavy rare earths. Estimates suggest Chinese dominance in heavy rare earth production approaches total market control.

As a result, even successful efforts to reshore light rare earth mining and magnet manufacturing still leave advanced economies dependent on China for the most strategically sensitive components.

China’s Advantage Is Geological, Not Just Industrial

It is often argued that China’s dominance stems mainly from its refining capacity and technical expertise, built up over decades. While this is true, it is only part of the picture.

China’s most enduring advantage is geological.

Heavy rare earths are most commonly found in ionic clay deposits. Southern China’s unique combination of geography, climate, and soil composition created ideal conditions for these deposits to form. Extraction from these clays is relatively straightforward, although often environmentally damaging, involving chemical leaching that can contaminate land and waterways.

Similar geological conditions exist in neighbouring regions, particularly parts of Myanmar. Chinese companies have increasingly sourced heavy rare earths from these areas, where environmental regulation is weak at best or completely absent. While supply from Myanmar has proven unreliable at times due to political instability, the underlying geology remains highly attractive.

Other regions do have rare earth potential. Brazil, for example, holds large reserves, but current production is negligible compared to China. Scaling output to replace Chinese supply would take many years, substantial capital, and significant regulatory alignment.

In developed economies such as the United States and Australia, environmental standards and community concerns present additional barriers to rapid expansion, particularly for heavy rare earth extraction.

What This Means Looking Ahead

China’s willingness to periodically restrict rare earth exports reflects a narrowing window of leverage. Over time, investment in alternative supply chains, recycling, and substitution technologies may reduce reliance on Chinese production. But in the near to medium term, rare earths, especially heavy rare earths, remain one of the most effective pressure points China can apply.

Governments are responding with funding commitments and strategic initiatives aimed at domestic production and supply chain resilience. While these efforts are directionally positive, they face hard geological, economic, and environmental constraints.

For investors, the key takeaway is that rare earths are not just another commodity. They sit at the intersection of geology, geopolitics, and technology. Supply is concentrated, substitution is difficult, and timelines for meaningful diversification are long.

Understanding these realities helps explain why rare earths continue to feature prominently in trade disputes and why this theme is unlikely to disappear anytime soon.