China Has Too Much at Stake in Industry Push to Listen to Yellen

Christopher Condon
·5 min read
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(Bloomberg) -- Janet Yellen got a respectful hearing in China in recent days for her main message — that Beijing’s manufacturing drive is a threat to other economies. But the warmth of her reception likely won’t translate into the policy shifts she wants.

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At a press conference in the Chinese capital Monday, the US Treasury chief wrapped up her four-day trip echoing the theme she began it with: the global economy will be adversely impacted by ramped-up factory exports from China, which needs to put more effort into shoring up consumer demand at home.

“It is a critical issue and it is one that could have an adverse impact on American workers and firms if we don’t find a solution,” Yellen told reporters at the US ambassador’s residence in Beijing. “My job here is to make sure I’ve explained this very thoroughly and presented this concern at the highest levels of Chinese leadership.”

There’s some overlap between her concerns and the agenda of Chinese leaders, who have recently warned about excess capacity in some industries. But they appear to see the issue as set to be solved by market forces over time, without the need for a wholesale shift in economic policy that entails a large-scale consumer stimulus or a rapid slowdown in manufacturing growth.

“They recognize that overcapacity is an issue, and I don’t think that they have ulterior motives to keep prices down,” as that hurts profits at domestic firms, said Alfredo Montufar-Helu, head of the China Center for Economics and Business at the Conference Board.

A reversal of policies that stimulate manufacturing is unlikely because of the persistence of two key motivations for that strategy: the slump in China’s property market and US curbs on technology. The pursuit of technological self-reliance “will continue, given the state of the geopolitical landscape,” Montufar-Helu said.

China will rely on the market to remove overcapacity, Vice Finance Minister Liao Min told reporters on Monday. That suggests Beijing views the elimination of unprofitable companies through mechanisms like bankruptcies and mergers will solve the issue.

New Sectors

Liao also pushed back on Yellen’s overcapacity claims in the solar and electric-vehicle industries. “Current production capacity is far from meeting market demand, especially the huge potential demand for new energy products in many developing countries,” he said.

Yellen stressed that surging Chinese output of things like EVs and batteries is a worry for many countries beside the US, and that shifting focus away from exports will be good for China too.

There’s a risk that China believes US criticism is in bad faith. Beijing already argues that the US is pursuing a Cold War-type approach toward it — seeking to slow its economic development. State-media articles have called overcapacity claims part of a “hidden agenda” to suppress Chinese hi-tech companies.

That won’t be helped by Yellen also using her trip to warn about a key source of political disagreement: Russia’s war in Ukraine. Chinese banks and exporters aiding Russia’s effort could face US penalties, she said.

Trade between China and Russia has surged since that conflict began in 2022 and Western companies pulled out. China’s Foreign Ministry said Monday that the country hasn’t sought to gain from the war and won’t do so. Yellen said she’s had “difficult conversations about national security” during the trip.

In public, the US Treasury chief spent most of the visit hammering home the argument that China should change course on economic policy.

At her press conference Monday, Yellen was asked by a Chinese reporter what Beijing is supposed to do, when local officials would worry that pulling back on investment would threaten jobs.

“Well, there’s supply and then there’s also demand,” she said. “One possible approach would be to boost demand and to see a larger share of GDP accrue to households.”

Senior Treasury officials said Yellen had urged such an approach in her meetings. During talks with Vice Premier He Lifeng — the czar for economic policy — she suggested China could spur domestic spending by strengthening retirement security and making education more affordable.

Beijing has tried for years to reorient its economy toward one driven by consumption, with little success. Last year, it unveiled a plan to boost household spending on everything from electric appliances to furniture, a project that it is still rolling out.

Least Hawkish

For all the disagreements, Yellen — who’s appreciated in China as one of the least-hawkish of senior US officials — was made welcome. For now, both sides have agreed to keep talking, with economic teams holding further discussions this month in Washington, China’s Finance Ministry said.

With President Joe Biden set to contest an electoral rematch against Donald Trump in November, and both men vying to look tough on China, Beijing is aware that more US curbs could be on the way.

The feting of Yellen was in part an attempt to ward off further restricions, said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA in Hong Kong. But American moves against China are more likely to come from other parts of government, like National Security Advisor Jake Sullivan, and not the Treasury chief, she added.

“This might be Janet Yellen’s last trip to China” in government, Garcia Herrero said. “The conciliatory tone is understandable, and the hard part will come from others.”

--With assistance from Lucille Liu and Tom Hancock.

(Updates with more details on China’s consumption push.)

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