Yellen advances US-China ties despite tough criticism on exports

After a long day of berating the Chinese government about overcapacity in their economy, US Treasury Secretary Janet Yellen joined China's Vice Premier He Lifeng for a boat cruise on the Pearl River on Friday evening in the southern megacity of Guangzhou.

On board, the pair exchanged gifts, according to two people present. The vice premier told Yellen he personally chose his offering — a large platter upon which a Chinese artist had replicated her official portrait. Yellen reciprocated with an artist-signed painting of the US capital's famous cherry blossoms and the Washington Monument.

The contrast between the day's tough rhetoric and evening bonhomie showed the gamut of Yellen's diplomatic task as she makes her second China trip in nine months, and likely her final visit to the country as Treasury secretary. She was welcomed by Premier Li Qiang in Beijing on Sunday, and will meet central bank Governor Pan Gongsheng on Monday before wrapping up with a press conference.

On one hand, Yellen's four days of meetings in China are aimed at enhancing personal ties she's painstakingly built with senior Chinese leaders, among whom she appears to have won respect.

At the same time, she appears willing to test those relationships. Yellen has chastised policymakers for flooding global markets with cheap goods, criticized the "unfair" treatment of American firms in China, and issued a stark warning 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," she said at an event hosted by the American Chamber of Commerce in China, adding that the nation's vast factory floor was currently churning out more than "the global market can bear."

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. Premier Li on Sunday advised Yellen against turning "economic and trade issues into political" matters.

Yellen was part of the economic consensus that, a generation ago, embraced China's entry into 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 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, Yellen now seems intent on preventing a rerun as President Xi Jinping tries to offset China's property crisis by shifting more investment into manufacturing, particularly new industries around clean energy — the same sectors the US is keen to foster at home.

During meetings with him on Friday and Saturday, 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 it was more targeted, and focused on domestic use, the official said.

While the meetings were cordial, 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.

Yet, Yellen's tough message hasn't hurt progress made between the two sides. They agreed 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."

The warm reception continued on Yellen's next stop in Beijing. She met Premier Li on Sunday at the Great Hall of the People, a visit that wasn't on her original schedule. China's No. 2 official gave Yellen's talks with He his stamp of approval, praising the "candid and in-depth discussions on key issues" in the US-China relationship.

After lunch with Beijing Mayor Yin Yong and a visit with economics students and faculty at Peking University, Yellen was given a private tour of the Forbidden City, an ancient palace complex in the capital.

It remains to be seen if the positive vibes surrounding her visit, despite the Treasury chief's pointed message, were a true product of better relations, or more a sign of what Gerard DiPippo, senior geo-economics analyst at Bloomberg Economics, calls "tactical stabilization."

China has struggled to attract fresh foreign investment and Beijing is likely keen to avoid re-escalating public tensions, DiPippo said. With November's presidential elections looming in the US, Beijing may just be biding its time.