As rare earth resources are indispensable raw materials for modern society, they have become strategic global reserve resources. Even though China is the world’s largest producer and exporter of rare earth, the industry has low efficiency and severe problems with over-exploitation and environmental pollution; therefore, there needs to be a greater focus on the sustainable exploitation of rare earth resources. This paper establishes an innovative evaluation index system for the sustainable development of China’s rare earth resources from six main aspects; economic development, social progress, environmental protection, technological innovation, rare earth development and utilization, and rare earth protection in which the indicators are assessed using an entropy method. Grey correlation analysis was used to evaluate China’s rare earth sustainable development level from 2006–2016, from which it was found that sustainable development was poor from 2006–2010 and marginally better from 2011–2016. The main factor affecting rare earth sustainable development in China was found to be the lag in the development of environment protection system and rare earth protection system. Policy recommendations for improving China’s rare earth protection, environmental protection, and technological innovation are proposed to guide government regulations and assist rare earth industry personnel.