China and Malaysia are holding early discussions on a rare earths processing venture that could see Beijing share its refining technology in exchange for access to Malaysia’s reserves, according to sources familiar with the matter.

Malaysia’s sovereign wealth fund Khazanah Nasional is expected to partner with a Chinese state-owned enterprise to build the refinery, though no final agreement has been reached.

The plan, if realised, would mark a rare policy shift for China, the world’s top rare earths supplier, which has long banned the export of its processing technology to safeguard its dominance in the sector.

Two sources in Malaysia said Beijing’s interest stems partly from a desire to curb competition from Australian producer Lynas Rare Earths, which operates a processing plant in Pahang.

However, hurdles remain. China has expressed concern over Malaysia’s ability to ensure sufficient raw material supply, while Malaysian authorities are weighing potential environmental impacts and regulatory challenges.

Malaysia, home to an estimated 16.1 million metric tons of rare earth deposits, has banned raw exports to preserve resources. Mining approvals require both state and federal clearance, and the government has ruled out extraction in sensitive areas such as permanent forest reserves and water catchments.

Global manufacturers, including automakers and magnet producers, are seeking to diversify supply chains after Beijing’s recent export restrictions disrupted production. For Malaysia, developing a domestic processing industry could provide strategic leverage, though officials have yet to comment publicly on the reported talks.