This study examined the evolution process of China’s rare earth policy, analyzed the drivers and mechanism of change, and identified the direction of future policy optimization and adjustment accordingly. Based on the key policies, China’s rare earth policy development can be divided into four stages: (1) encouraging the export of rare earth and standardizing mining procedures (1985-2004); (2) implementing export quantity management and enhancing export pricing power (2005-2010); (3) improving industrial rule and order and adjusting organizational structures (2011-2014); and (4) industrial supply-side structural reform (2015-present). Next, this study used the pressure-state-response (PSR) model to analyze the drivers of policy change, and used the causal feedback diagram in system dynamics to describe the policy change mechanism. The results indicate that the drivers of China’s rare earth policy change mainly include the force of industrial supply-side problems, the constraints of national macro-policy adjustments, and the promotion of the global development trend. Generally speaking, the formulation of China’s rare earth policy to some extent lagged behind developments in the industry, was passive in nature, and lacked clear policy objectives, and its driving mechanism was mainly manifested as a forced mechanism and a restraint mechanism. Finally, this study constructed the PSR model of China’s rare earth policy in the new era, pointing out that under the dual pressures in China and internationally, the rare earth industry faces challenges such as mismatch between supply and demand, insufficient downstream application level, imperfect environmental taxation system, and endangered global competitiveness. In the future, a two-way problem-oriented and goal-oriented mechanism should be formed, and response policies should be optimized and adjusted from four aspects: optimizing resource development strategy, stimulating enterprises’ enthusiasm for research and development, improving the environmental taxation system, and formulating global resource strategic layout and industrial governance based on the characteristics of light and heavy rare earth.