Yellen Eyes Valuable Asset on China Trip: Insight on Economy

U.S. Treasury Secretary Janet Yellen and her team are hoping their second visit to China in nine months, building on a series of bilateral talks, will yield valuable clues to the true state of the world’s number-two economy—even if no significant policy agreements are anticipated.

China has cracked down on the availability and discussion of some unflattering data in recent years, as the nation’s economy faces major threats from a property crisis and geopolitical spats. Gleaning information about the Chinese economy, including details on the measures Beijing is considering to secure the government’s 2024 growth goal, will be a key focus of the Yellen delegation, a senior Treasury official told reporters ahead of this week’s visit.

Yellen departs Wednesday, on the heels of the first one-to-one communication between Presidents Joe Biden and Xi Jinping since November. She’s scheduled to meet China’s economic policy czar, Vice Premier He Lifeng, along with his predecessor Liu He, who analysts say retains influence, and the central bank and finance chiefs.

Yellen’s visit also represents one of the last chances for Xi’s team to shape American economic policy toward China before the U.S. election, in which both candidates are vying to look tough on Beijing. Former President Donald Trump has already threatened a 60 percent tariff on Chinese goods if elected.

Underscoring the new era of sensitivity, former Morgan Stanley Asia chair Stephen Roach said in a Radio Free Asia interview that he was pressed to express only “views constructive to China” at the annual China Development Forum last month.

In addition to the talks helping Treasury staff get a better sense of what’s going on in China’s economy, maintaining regular contact with Chinese counterparts serves as a form of risk management amid U.S.-China tensions, says Mark Sobel, a former Treasury official who’s now U.S. chairman at the Official Monetary and Financial Institutions Forum, a think tank.

“Even if the talks are not ‘productive’—however one would gauge that—they are still significant and positive,” Sobel said. “The talks will help avoid misunderstandings and provide the other side with context.”

Yellen has built contacts with Chinese economic policy leaders and jumpstarted regular staff-level meetings between the two nations. But for all the headway, there’s little by way of fundamental improvement in U.S.-China relations, and the prospect of a second presidential term for Trump threatens to up-end relations again.

“Can you set a positive tone? Probably,” said Gerard DiPippo, senior geoeconomics analyst at Bloomberg Economics. “Is that going to change the overall trajectory? No.”

Forged Relationships

According to one senior Treasury official, who spoke on the condition of anonymity, that’s exactly what happened on two separate occasions: when the Biden administration unveiled proposed restrictions on U.S. investments in China and when the United States resisted giving China more say over the International Monetary Fund (IMF).

In the first instance, the official said, Yellen presented the investment curbs as narrowly targeted, motivated by specific national security concerns and not aimed at hobbling China’s economy. Chinese officials still didn’t like it, the person said, but what might have produced a heated diplomatic dispute was instead reduced to what the official called a technocratic exchange.

Despite the smoother-than-expected discussions, China is still opposed to the U.S. measures, with Xi telling Biden this week that the “endless” U.S. restrictions and sanctions on China’s tech sector are creating risks instead of de-risking.

The IMF position was another potential flashpoint, but Yellen’s face-to-face session with central bank Governor Pan Gongsheng in October proved crucial to avoiding a clash, according to U.S. officials.

Not every interaction has gone so well. Despite a major effort, Yellen has so far failed to convince China—now the largest creditor to developing countries—to participate fully in an international effort to smooth debt restructuring for poor nations in or near default.

Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center in Washington, says Yellen’s latest trip comes at an opportune time, just weeks before the IMF and World Bank hold their spring meetings in Washington.

“Can the U.S. and China come together and work with other partners on debt relief? We just haven’t seen it yet,” said Lipsky. “This is the big test coming into the IMF meetings.”

The Treasury official cautioned that while some progress on this matter is happening, it’s strictly on a country-by-country basis.

Subsidized Manufacturing

Then there’s a fraught issue that Yellen has promised to raise on this trip: industrial overcapacity in China, fed by state subsidies. Many countries worry Beijing is channeling overproduction into exports and distorting global markets.

Last week Yellen accused China of seeking to dominate green energy sectors through massive subsidies, but she demurred when asked if the United States would threaten retaliation. “It’s important for the Chinese to understand why we have a concern,” she said. “But I don’t want to get to retaliation. We want to see what we can do that’s constructive.”

Huang Hanquan, president of China’s Academy of Macroeconomic Research, a think tank under China’s top economic planning agency, said last week that “the theory that China’s subsidies caused unfair competition in the world is groundless.” Huang said the government aims to provide all companies in China—including foreign firms—equal access to subsidies.

Bloomberg Economics’ DiPippo is skeptical that fresh discussions over subsidies will yield a breakthrough, but both parties have reasons to keep talks cordial.

“The Biden administration obviously wants to appear tough on China, but also doesn’t want to deal with any economic blowback of actually escalating,” he said. “China’s economy is doing not so well, and they’re trying to get foreign investors to come back.”

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