China has enacted a new regulation, effective October 1, asserting state ownership over its rare-earth materials required in semiconductor production, reports Nikkei. This move aims to secure national and industrial interests, though outside of China the move is considered to be leverage in the ongoing trade war with the U.S.

The new regulation prohibits any individual or organization from unlawfully accessing or damaging rare-earth resources. We could interpret the rule as basically an explicit declaration of state ownership of important rare earth metals, such as gallium and germanium. Notably, the statement of state ownership was not part of the initial draft but was included in the final version to emphasize control over these strategic materials.

China's action could be a response to U.S. export rules restricting Chinese access to advanced wafer fab equipment required to make chips at sub 14nm/16nm process technologies. While by tightening control over rare-earth elements, China says it aims to safeguard its industrial interests against international pressures, industry observers from outside of China believe that the country can use export controls as a lever in negotiations with the U.S., Europe, and Japan.

The regulation covers the entire supply chain of rare-earth elements, from mining and smelting to processing, distribution, and export. It stresses safety, innovation, and sustainable development as guiding principles for managing these resources.

In 2023, China produced about 70% of the world's rare-earth elements, essential for various devices. When it comes to gallium, which is used for power ICs, China produces approximately 94% of the world's supply, so its restrictions are very likely to impact various industries.  While the production of high-performance components like CPUs, GPUs, and memory may not be heavily impacted, gallium nitride (GaN) and gallium arsenide (GaAs) are critical for power chips, radio frequency amplifiers, LEDs, and other applications.

Both gallium and germanium are crucial for high-tech industries, but while these metals are not exactly scarce, China has kept their prices low, making mining them elsewhere relatively unprofitable. China's restrictions have affected the prices of these metals, but this incentivized companies in other countries to start extracting them, which will eventually potentially diminish China's dominance in the market. For now, despite efforts to increase domestic production, the U.S. still depends on China for processing these materials, according to Nikkei.

By asserting state control, China aims to maintain its dominance in the rare-earth metals sector. The question is, will it work out?