On paper it looks like a disadvantage for China, but I don't think it actually works to China's advantage. One of the problems in working with power blocs is that it highly favors the established powers. It's just too politically costly for smaller countries to shift to the emerging power's power bloc because it can mean getting cut out from the markets of the other power bloc. If China were to form a formal power bloc, it's hard to see countries like Indonesia or Chile joining it. And yet these countries have China as the largest trading partner and their politics are likely to favor the Chinese viewpoint as opposed to the American one. Moreover, it also allows China to remain unengaged if these countries find themselves in conflicts with other powers.
Chinese rare earth producers shouldn't be suffering much. Currently China's industry consumes so much that there won't be much surplus production, and what surplus there is can be drawn into China's strategic stockpiles. Overall, the dollar value of the entire rare earth industry is very small - only a few billion per year. This is so little that it's easy for China to forgo the revenue yet it's utterly critical for a large host of industries so it's effectively the world's strongest bargaining chip.
