State-owned China Rare Earth Group is in talks to acquire Shenghe Resources, said two sources with knowledge of the matter, a move that would consolidate Beijing's control over the sector and give the firm a stake in one of Washington's rare earth plays.

If successful, the deal would hand over control of Shenghe's stakes in foreign firms, including a 3% share of US rare earths company MP Materials, which counts the US Department of Defense as its largest shareholder after an investment last year.

Talks between the two companies have been underway since earlier this year, said the sources who spoke on the condition of anonymity given the sensitivity of the matter. China Rare Earth Group wants to take a controlling stake, one of the people said.

The sources did not know when the acquisition would be announced or completed.

An acquisition would give China Rare Earth control over one of the last leading Chinese companies in rare earth mining and refining with some private ownership, bringing to a close a decades-long push to consolidate the sector under state control.

It would also give Beijing tighter control over elements that are vital to electric vehicles, wind turbines, electronics and the defense sector. It has wielded this control to great effect in its trade war with the US.

Last year, Shenghe acquired Australia's Peak Rare Earths.

It is not clear how the prospect of a major Chinese State-owned rare earth firm sharing space on a shareholder registry with the US Department of Defense could impact the deal. The sources did not know what would happen to Shenghe's overseas assets and stakes.

MP has repeatedly said neither Shenghe nor the Chinese government has any control over its operations.

China Rare Earth Group, Shenghe Resources and the Ministry of Commerce did not respond to requests for comment.

A deal would also grant Shenghe better access to quotas that Beijing typically uses to control supply, according to one of the sources. Beijing grants those quotas to state-run companies and then the quotas are allocated to subsidiaries.

The quotas for mining, smelting and separation are closely monitored as a barometer for global rare earths supply, but China has held back from publicly disclosing them.

China Rare Earth Group, set up in 2021 after reorganizing five state-run rare-earths-related companies, is the country's largest supplier of heavy rare earth elements.