The immediate spat is over the Senkaku or Diaoyu Islands in the East China Sea.

China is the major producer of rare earths in the world. The US had a rare earth mine, but closed it due to environmental and cost issues. Work on this mine and others outside of China are now being done.

I fear China by blocking the export of rare earths is shooting itself in the foot. And right before the US mid-term elections. Poor timing with the Yuan issue.

And other nations in Asia are frustrated with China's claims and actions recently including:

Philippines - South China Sea
Vietnam - Various islands and South China Sea.
Korea - Sinking of ship

China is trying to negotiate with each country directly, while the other countries are trying to work as a group and get US involved.

References:
Amid Tension, China Blocks Rare Earth Exports to Japan - NY Times

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