China may be willing to soften the impact of its cut in rare earth export quotas

China may be willing to soften the impact of its cuts in exports of rare earth elements on firms around the world that depend on them to make high-tech and defense products, EU-based diplomats said on Thursday.

China controls more than 95 percent of global rare earth supplies, giving it a stranglehold over a scarce resource used in a range of products from mobile phones to hybrid batteries.

It has decided to cut its exports on environmental grounds, alarming global industry and prompting discussions among G20 leaders about the potential impact, but a Chinese diplomat indicated China could be open to discussions on the issue.

"We are open to an amicable solution," the Brussels-based diplomat told Reuters, speaking on condition of anonymity.

"We are happy to continue a sustainable supply."

A European diplomat also said there were early indications China was willing to soften its approach on rare earth export quotas.

The European Union has called on China to keep exporting the vital commodity until new mines can produce alternative supplies.

The EU's top trade official, Karel De Gucht, has said the EU will push for a gradual slowing of Chinese exports during meetings in Beijing in December.

STANDOFF OVER SUBSIDIES

But China has indicated it will not ignore European Union moves to penalize China's state subsidies and cheap loans to manufacturers.

EU trade policy plans unveiled in October threatened harsh action against illegal Chinese trade practices, and scrutiny of

subsidies which EU firms say give their Chinese rivals an illegal competitive advantage.

"We should be very careful and try and avoid large-scale trade frictions," the Chinese diplomat said. "Subsidies are a very contentious issue."

Concern is rising in mature economies like the European Union and the United States that China's competitive edge will push traditional sectors out of business, worsening unemployment.

The EU trade deficit with China reached 133 billion euros ($177 billion) in 2009, according to EU figures. But EU exports to China grew 4 percent between 2008 and 2009, as China's rising middle class and relative resilience in face of the financial crisis provided a booming market.

According to Chinese statistics, two thirds of China's 2009 exports were generated by China-based foreign companies -- reason enough to quell European fears that China represents a threat, the Chinese diplomat said.

"China is the general place for foreign business to make profits. It has become a safe harbor for them."

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