The move would increase China's monopoly on the elements and comes just six months after China cut its target output from rare earth mines by 8.1 percent for 2010 and imposed a moratorium on all new mining licenses until June 30, 2011.
China produces 97 percent of the world's supply of rare earth elements, although it has only about 53 percent of the world's rare earth deposits.
A draft proposal on mining rights for the elements was submitted this week to China's State Council.
"Once approved, the Ministry of Land and Resources will issue licenses and start allocating the resources to those companies," an unnamed official told China Daily newspaper. "Private enterprises can only collaborate with the selected firms through shareholding."
Demand for the 17 rare earth minerals has tripled in the last decade to 120,000 tons.
The elements are indispensable to a range of green energy and high-tech components such as wind turbines, low-energy light bulbs, batteries for hybrid and electric cars, lasers, fiber-optic cables and cell phones.
Each Toyota Prius, for example, uses 25 pounds of rare earth elements.
The elements also used for military applications, such as missiles.
James Bacchus, the chairman of the World Trade Organization's appellate body, wrote in The Wall Street Journal last month that China was "hoarding rare elements and other raw materials."
But He Weiwen, managing director of the China Society for World Trade Organization Studies told China Daily, "WTO rules stipulate that its members can take measures to protect their raw materials from being exhausted and China's measures are in line with them."
China maintains that the overhaul of its rare earth mining sector is aimed at conserving reserves following years of exploitation that have taken a toll on the country's environment.
Despite soaring demand, the minerals' price increased by only a little more than 20 percent from 1979, to an average of $8,500 per ton in 2009.
"We want a higher price on our rare earth minerals," said Zhang Anwen, deputy secretary general of the Chinese Society of Rare Earths, a government-affiliated research organization in Beijing, The New York Times reports. "Foreign buyers should more or less share our costs, including the high cost of reducing environmental pollution."
Zhang said China's latest proposal is critical and will benefit the industry.