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Janet Yellen has kicked off her second visit to China as US treasury secretary with a warning of the risk to jobs and businesses posed by overproduction of certain goods in the world’s second largest economy.
On Friday, her first full day of meetings in the southern megacity of Guangzhou, Yellen said she would address the oversupply of Chinese goods in key industries, such as electric vehicles (EVs) and solar panels.
The issue has quickly emerged as a major area of contention globally and in the run-up to November’s US presidential election.
“Overcapacity isn’t a new problem, but it has intensified, and we’re seeing emerging risks in new sectors,” Yellen told a group of China-based American executives. “This can undercut the business of American firms and workers, as well as of firms around the world, including in India and Mexico.”
She first mentioned the issue at an earlier meeting with the leaders of Guangdong province, the country’s economic powerhouse.
US officials and lawmakers have expressed concern that China’s overinvestment and excess capacity could result in cheap products flooding global markets, affecting local industries and employment.
Asked by reporters on Wednesday whether she would consider trade barriers if China doesn’t heed warnings on overcapacity, Yellen said she “wouldn’t want to rule [it] out,” though she wasn’t planning any immediate measures.
Last month, on a visit to a solar panel factory in Georgia, Yellen said China’s excess capacity was distorting prices and production patterns and hurting American firms and workers. She added that China was following its old practice of flooding the global markets with cheap, state-subsidized steel and aluminum.
She also hinted on that trip that the surge in China’s exports of EVs, solar panels, and batteries was creating a problem at a time when the United States has invested heavily in reviving its own manufacturing sector.
For its part, Beijing is aware of the country’s overcapacity problem, having acknowledged it as a key challenge at an annual economic work conference in December.
But last month, several Chinese state-owned media outlets published editorials challenging the notion that China’s supply glut poses a threat to other economies. “What China exports is advanced production capacity that meets the needs of foreign customers,” the Xinhua news agency wrote.
Invoking a reformer
At the meeting hosted by the American Chamber of Commerce, Yellen flagged concerns about what she called China’s “shift away from a market approach on the US and global economy” by providing state subsidies to some manufacturing industries.
She referred to her host city of Guangzhou to make a point about the importance of pragmatism and openness by invoking Deng Xiaoping, the late reformist leader who led China away from a planned economy and Maoist ideologies.
“It was a key stop on Deng Xiaoping’s 1992 Southern Tour, when he renewed China’s commitment to these [market-oriented] reforms,” she said. “It’s a fitting place for me to emphasize the strong economic ties between the United States and China, and the benefits these ties can bring for both the US and Chinese economies.”
The tour marked a critical point in modern Chinese history. That year, Deng, then 88, made a surprise visit to the special economic zones in Guangdong that he had established previously and confirmed China’s commitment to market-oriented reforms and economic liberalization.
The tour, which happened during a period of political uncertainty, is widely considered to have revived the process of China’s reform and opening up, which had almost stalled after 1989.
Yellen is scheduled to spend four days in Guangzhou and Beijing and is expected to meet Chinese Premier Li Qiang, former Vice Premier Liu He, People’s Bank of China Governor Pan Gongsheng and Finance Minister Lan Fo’an.
On Friday afternoon, Yellen met with Vice Premier He Lifeng during which she emphasised the importance of a “level-playing field” for companies and workers in both countries.
Following the meeting, He will host a dinner for Yellen.
Craig Singleton, senior director of the China program at the Foundation for Defense of Democracies (FDD), a non-partisan think tank in Washington, said tangible outcomes from the trip may be “limited.”
“For now, China’s primary focus remains portraying itself as open for business and alleviating growing concerns about the government’s to-date meager measures to tackle the country’s looming economic downturn,” he said.
Yellen told reporters traveling with her to China that the meetings should be seen as a “continuation of a dialogue” between the US and China since Biden and Xi’s November 2022 meeting at the G20 in Bali.
Trade tensions
Biden administration officials have suggested raising tariffs on Chinese imports to “level” the playing field for trade. As the US approaches the presidential race, candidates from both parties are trying to look tough on Beijing. Former President Donald Trump has threatened to slap 60% tariffs on imports from China if he is re-elected.
Trade tensions are rising as Chinese leaders increasingly utilize a strategy of boosting manufacturing for export to make up for weak demand at home amid loss of economic momentum.
Beijing has poured money into new industries such as EVs and batteries as it seeks alternative growth engines beyond the property sector, a major pillar of the Chinese economy, which has crumbled.
“China accounts for a third of global production but only a sixth of global consumption, and this reality risks breaking the global trading system,” said Rick Waters, managing director of Eurasia Group’s China practice.
“Xi’s emphasis on ‘new productive forces’ as the future driver of growth will only make matters worse in the absence of measures that boost domestic consumption.”
Xi coined the term ”new productive forces” last year, highlighting the need for a new model for economic growth based on tech innovation. The “forces” are often referred to as emerging industries such as EVs, new materials and artificial intelligence.
Conflict over trade is likely to grow further before the election, Waters said. He said the Section 301 investigation — which allows the US government to impose tariffs, fees or other restrictions to address unfair trade policies by foreign governments — and the likely realignment of Trump-era tariffs to increase barriers to EV and other imports are all on the table.
Among other topics that Yellen plans to discuss with her Chinese counterparts include bilateral cooperation on countering illicit finance and working on global issues such as climate change and financial stability, according to the Treasury Department.
But analysts don’t think Beijing is likely to budge on its economic policies.
“Yellen’s upcoming meetings merely extend the illusion of constructive engagement between two superpowers — reinforcing, rather than resolving, China’s contentious course,” Singleton said.
He believes Beijing wants to reduce the role of US multinationals in supply chains deemed sensitive by the Chinese government, while deepening its control over China’s private sector and international companies operating in China, noting recently enacted national security legislation in Hong Kong.
This story has been updated with additional developments.
