US Treasury Secretary Janet Yellen implored Beijing’s top leaders to fundamentally rethink their economic growth strategy, as she wrapped up a high-stakes trip to China that’s been a balancing act in strengthening bilateral ties while delivering stark criticisms.
China’s economic imbalances and massive government subsidies of certain sectors will “lead to significant risk to workers and businesses in the United States and the rest of the world,” she said at a press conference in Beijing on Monday.
Throughout four days of meetings, Yellen repeatedly framed China’s strategy of boosting its already huge manufacturing capacity as a widespread global concern, and urged leaders to focus instead on revving up domestic demand. President Xi Jinping has made bolstering advanced manufacturing a top priority as he seeks to achieve around 5% growth this year despite a deep real estate crisis.
Yellen’s second China trip in nine months, and likely her final one to the country as Treasury secretary, comes as the world’s biggest economies are trying to stabilize their tumultuous relationship while working out deep differences in policymaking. The US has criticized China for flooding the world with cheap goods, as it pours resources into the same green sectors the Biden administration is also trying to expand.
Beijing rejects that message, arguing its companies are being penalized by developed nations that can’t compete on price, and has filed a case with the World Trade Organization over American subsidies. Still, while Premier Li Qiang on Sunday advised Yellen against turning “economic and trade issues into political” matters, meetings between the two sides have been cordial.
“The US has leverage because China’s economy is still fragile,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics, adding that it was Beijing’s interest to “play nice” with a US presidential election in November posing fresh risks. “That’s why even though Yellen is making harsh comments, they are not freezing her out,” he added.
As well as holding talks with senior officials including central bank Governor Pan Gongsheng, Yellen met with economists and American business chiefs during her trip. She chastised Beijing’s policymakers for reckless exports, criticized the “unfair” treatment of American firms in China, and warned that Chinese companies would face “significant consequences” for supporting Russia’s war in Ukraine.
“China is too large to export its way to rapid growth,” Yellen said at an event hosted by the American Chamber of Commerce in China, adding that the nation’s factories are currently churning out more than “the global market can bear.”
Exemplifying Yellen’s delicate diplomatic task, she balanced such rebukes with bonhomie including a boat cruise on the Pearl River in the southern city of Guangzhou with Vice Premier He Lifeng on Friday. During that excursion the pair exchanged gifts, according to two people present. The vice premier presented Yellen with a large platter upon which a Chinese artist had replicated her official portrait. Yellen reciprocated with an artist-signed painting of the Washington Monument.
Yellen’s position marks a stark change from a generation ago when she was part of the economic consensus that embraced China’s entry into the WTO, opening the door for Beijing to ship cheap goods globally and lift millions of its citizens out of poverty. Policymakers underestimated the destructive impact China’s manufacturing boom would have on industry in the US and other economies, something many see as central to the rise of political populism and former US President Donald Trump.
As Treasury chief, she now seems intent on preventing a rerun as Xi tries to offset China’s property crisis by shifting more investment into manufacturing.
The US lost 2 million jobs in the years after China joined the WTO, Yellen said on Monday. “That really led to the hollowing out of industrial production in many parts of the country,” she added. “I simply would say it would not be acceptable to the United States or to President Biden to allow this to happen again.”
During meetings with Vice Premier He, Yellen gave specific details of how she thinks certain US industries are coming under threat, according to a senior Treasury official involved in those talks. Responding to Chinese criticisms of US subsidies for its domestic semiconductor and clean energy sectors, Yellen argued American policies are more targeted, and focused on domestic use, the official said.
The Treasury chief suggested China boost retirement security and make education more affordable in order to spur domestic spending, and bring down high household saving rates, during her trip. Both tasks would likely take the ruling Communist Party a long time to achieve.
Not all of Yellen’s public criticism has gone down well. The official Xinhua News Agency on Friday published a commentary blasting Yellen’s “Sinophobic narrative of ‘Chinese overcapacity,’” saying it “smacks of creating a pretext for rolling out more protectionist policies to shield US companies.”
During meetings the Chinese side also expressed Beijing’s “grave concern” over US trade and investment restrictions, Xinhua reported. President Joe Biden has imposed a slew of curbs to kneecap China’s access to advanced semiconductors, citing national security concerns.
The Treasury chief’s tough message didn’t stop the two sides agreeing to move forward with a new round of talks focused exclusively on what Yellen and He euphemistically referred to as “balanced growth in the domestic and global economies.”
Still, if fundamental differences remain on the way forward for economic policy, such talks stand to achieve little.
“Yellen’s accusation of ‘overcapacity’ will not help solve the China-US trade issue,” said Wang Wen, executive dean of Chongyang Institute for Financial Studies at Renmin University of China. “On the contrary, it will only make China realize that the US lacks sufficient sincerity.”
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