Japanese manufacturers concerned about China's export quotes on rare earths may resolve their supply concerns by moving production to China.

By setting up shop inside China, where some 95 per cent of the world's rare earths are produced, manufacturers can obtain the metals on the cheap and then export the finished products outside the quota system.

Such a shift in production, which companies are only beginning to explore, could leave miners developing new sources of rare earths outside China scrambling for customers.

Analysts also expect the move to lead to a leak of technology behind Japan's strategic high-tech products, particularly sophisticated magnets used in hybrid cars, now produced by only three companies in Japan.

"China is eyeing the valuable know-how foreign companies will bring into joint ventures with Chinese firms to gain access to rare earths," said a Japanese trading company official, who asked not to be identified.

A move into China could topple Japan's technological supremacy and damage its manufacturing sector, already reeling from this year's tsunami and nuclear crisis.

At the same time, a crippling of the nascent rare earth sector outside China could jeopardize the long-term supply of the group of 17 technology metals.

Rare earths are used to produce magnets that are smaller and more powerful than traditional magnets, making them crucial to products such as smartphones and tablet computers.

Rare earth prices have skyrocketed as China slashed export quotas, cutting shipments outside the country to 30,184 tonnes in 2011 from 60,000 tonnes in 2007.

That has prompted Hitachi Metals, the world's top high-powered magnet maker, to consider moving production of its neodymiumbased magnets to China and the U.S., where a rare earth mine is to reopen in 2012.