China’s rare-earth dominance reveals the strengths and vulnerabilities of its distinctive political economy — and offers lessons for competitors such as Japan.

In 2024, China mined 60% of global rare earths but produced 91% of refined oxides and 94% of sintered permanent rare-earth magnets. This dominance reflects more than geological luck, cheap labor and state subsidies, although each played a role.

China captured the rare-earth magnet supply chain through an evolving industrial policy that melded communist economic planning with capitalist market dynamics. The state set strategic direction and controlled critical gateways, while firms absorbed technology, cut costs and scaled production. This produced the world’s most complete and lowest-cost mine-to-magnet innovation ecosystem — and a formidable source of geoeconomic leverage.

Built and bound by the state

The distinction between “state-led” and “market-led” development obscures how China’s economy works. Reform and opening did not replace planning with a free market. Beginning in the late 1970s, Deng Xiaoping dismantled the rigid Soviet-style planned economy while expanding the role of private markets. But the goal was to embed markets within a Marxist-Leninist political system. In practice, China’s socialist market economy permits private initiative but often subordinates it to the goals of the Chinese Communist Party and the state, steering capital toward strategic priorities. This institutional innovation suits China’s political system: Markets produce innovation, while the state retains extensive ownership in key sectors and the power to guide markets toward strategic goals.

The rare-earth magnet ecosystem offers an example. During the 1990s, Beijing designated rare earths as protected minerals, constrained foreign participation in mining and encouraged technology-bearing investment downstream. Policy incentives favored processing and manufacturing inside China. Policy later shifted toward environmental regulation, traceability and tighter control. Formal mining and separation quotas are now concentrated in two state-owned groups, giving Beijing tighter oversight of upstream feedstock and making its 2025 export control regime more........

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