Creation of the new organisation follows complaints from the European Union, the United States and Japan that China is illegally choking off exports of rare earths to hold down prices for its domestic manufacturers and pressure international firms to move operations to China.
The complaint was made to the World Trade Organisation in March.
The new industry association, with 155 members across China, will report to the Ministry of Industry and Information Technology, which regulates rare earth production, the official Xinhua news agency said on 8 April.
Baotou Steel Rare Earth in Inner Mongolia, Rising Nonferrous in Guangdong and China Minmetals are among 13 heavyweight members, Xinhua reported.
Su Bo, an industry vice minister, said Beijing wanted to shake up the industry by phasing out small smelters, giving big players a greater stake in the supply of rare earth metals and boosting environmental protection.
"China will continue to clean up the rare earth industry, expand rare earth environmental controls, strengthen environmental checks, and implement stricter rare earth environmental policies," Su said.
Xinhua said the long-awaited body would promote international exchanges and help Chinese companies to handle trade disputes. China's rare earth export quota is managed by the Ministry of Commerce.
China accounts for about 97% of world output of the 17 rare earth metals crucial for the defence, electronics and renewable-energy industries and used in a range of products such as the iPhone, disk drives and wind turbines.
Beijing has said its export curbs are necessary to control environmental problems caused by rare earth mining and to preserve supplies of an exhaustible natural resource.