HOHHOT - The government of north China's Inner Mongolia Autonomous Region has given green light to the establishment of a rare earth exchange in the city of Baotou, local authorities confirmed Thursday.

Baotou Steel Rare Earth Hi-Tech Co., the country's largest rare earth producer, said in a Wednesday statement that it had received approval from the government for the establishment of the exchange.

The government of Inner Mongolia has ordered the rare earth producer and Inner Mongolia Hi-Tech Holding Co., Ltd. to set up a company to operate the exchange, according to the statement.

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However, the government required that the exchange should not deal in futures trading.

Sources close to the matter say the exchange can only deal with spot transactions of rare earth.

Industry analysts say the exchange would  help China play its influence over rare earth pricing on the global market.

Ma Peng, former director of the Baotou Research Institute of Rare Earths, said the establishment of the exchange would help regulate the trading of rare earth.

"It is a positive step. Should the exchange operate successfully upon completion, it will help create a transparent and scientific pricing mechanism for rare earth trading," Ma said.

Zhang Zhong, general manager of Baotou Steel Rare Earth Hi-Tech Co., said a preparatory working group was already in place for  setting up the rare earth exchange.

Zhang, however, did not say when the exchange would become operational.

Sources say the exchange would have a registered capital of no less than 100 million yuan (US$ 15.4 million).

China is the world's largest producer of rare earth, a collection of 17 elements vital in manufacturing a large variety of products, including flat-screen monitors, electric car batteries, wind turbines, missiles and aerospace alloys.

China, with its rare earth reserves accounting for about one-third of the world's total, supplies about 95 percent of the global demand for rare earth.

Baotou, dubbed the "capital of rare earth", has 87 percent of the country's rare earth reserves and accounts for about half of the country's rare earth exports.