China has issued warnings to foreign companies not to stockpile rare earth elements, as it seeks to strengthen its control over a sector critical to both civilian and defense technologies. The move comes amid growing global demand for these minerals, which are essential in electric vehicles, wind turbines, and advanced electronics.

The Financial Times, citing two sources familiar with the matter, reported that Chinese authorities are instructing companies to avoid building large inventories of rare earths and related products, such as permanent magnets. One of the sources stated, “Beijing is telling companies they cannot go out and build huge inventories in rare earths, or they will face shortages.”

Another source said the Chinese government is deliberately limiting export approvals to restrict stockpiling, calling it a new point of leverage in the ongoing US-China trade war.

China currently processes about 90% of the world’s rare earth minerals and produces 94% of permanent magnets. Its dominance in this sector has become a powerful tool in trade negotiations, particularly with the US.

Read more: China holds the rare earth power behind US military might: FP

In April, Beijing placed seven categories of medium and heavy rare earth elements on an export control list in response to US President Donald Trump’s new round of tariffs. The restrictions also covered permanent magnets and other finished products, prompting immediate supply shortages in sectors like automotive manufacturing.

Despite a 90-day extension in the tariff truce between Washington and Beijing, China's restrictions on rare earth exports remain firmly in place.

Impact on foreign companies and global industries

China manages rare earth output through strict quotas on mining and processing. Last year, only two state-owned firms were granted production quotas. Although some exports have resumed following complaints from foreign governments and businesses, trade data shows a tightly controlled flow.

In June, China exported 3,188 tonnes of rare earth permanent magnets, more than double the amount exported in May, but still 38% lower than the previous year. Overall, exports in the three months since the new controls began were half the volume seen in the same period last year.

Application delays, government scrutiny

A recent survey by the US-China Business Council (USCBC) revealed that half of its members had their rare earth applications either rejected or left pending. According to the report, large orders exceeding historical averages drew particular scrutiny to prevent perceived stockpiling.

“Applications are also reviewed line by line,” the report stated. “Any discrepancies can result in the delay or return of the application.”

Sources involved in the process said that companies with urgent needs often relied on industry associations to escalate cases to China’s commerce ministry, which then prioritized certain applications.

Read more: Quad forms initiative to challenge China rare minerals control

Companies shift production to China

The restrictions are prompting some Western firms to move parts of their production to China. This shift aligns with Beijing’s goal to consolidate more control over the rare earth supply chain within its borders.

Louis Pinkham, CEO of US-based Regal Rexnord Corp, said the company has moved some operations to China to assemble rare earth magnets domestically and simplify export logistics.

“For the last four months, I have been on one or two calls every week, working with our teams to manage this situation,” Pinkham told analysts. “There is no question that this is not a great use of time.”