U.S. Treasury Secretary Janet Yellen arrived in China's southern factory hub of Guangzhou on Thursday with a stern message for Chinese officials: the world cannot absorb the flood of goods resulting from years of massive government subsidies and weak domestic demand. Yellen's second trip to China in less than a year comes on the heels of a phone call between President Joe Biden and his Chinese counterpart Xi Jinping, during which they clashed on U.S. trade restrictions but expressed hope for stabilizing relations.
In a series of meetings with top Chinese economic officials from Friday through Monday, Yellen will convey her view that the excess production in key sectors such as electric vehicles (EVs), batteries, solar panels, and semiconductors is unhealthy for China and is causing growing concern among major economies, including the U.S., Europe, Japan, and Mexico. A senior U.S. Treasury official, speaking on condition of anonymity, said, "We see a growing threat of money losing firms that are going to have to sell off their production somewhere," adding that Yellen would explain, "If there are trade actions around the world, it's not an anti-China thing, it's a response to their policies."
However, Beijing appears to be doubling down on investing in more manufacturing capacity in favored high-technology sectors, a stance that is increasingly at odds with other major economies. Brad Setser, a former trade official at both the U.S. Treasury and the U.S. Trade Representative's office, noted, "I do think the stage is set for renewed tensions with China. It's an intrinsic question whether other countries want to import China's distortions." Setser suggested that Yellen's warnings about Chinese overproduction may be an initial step by the Biden administration towards new tariffs or other trade barriers on Chinese EVs, batteries, and other goods.
The results of China's prior investment binges are staggering. In the automotive sector, China had the capacity to produce 43 million vehicles annually by the end of 2022, but its plant utilization rate was just under 55%, translating to an excess production capacity of about 10 million vehicles a year, according to Bill Russo, the Shanghai-based founder and CEO of advisory firm Automobility. The situation in China's solar panel sector is even more dire, with overproduction pushing prices down 42% last year to levels 60% below the cost of comparable U.S.-made products. China now accounts for 80% of global production capacity, and major solar producers continue to build factories, backed by provincial and local subsidies.
During her visit, Yellen plans to meet with Chinese Premier Li Qiang, Vice Premier He Lifeng, central bank governor Pan Gongsheng, and Finance Minister Lan Fo'an. Talks with He will delve into both countries' economic conditions and address more sensitive areas such as national security issues and Beijing's alleged support for Russia's defense industrial base. Treasury Under Secretary for International Finance Jay Shambaugh told AFP that the United States wants to see shifts in Chinese industrial support and issues like production targets that "exceed what the global market can bear."
While the meetings themselves are seen as a positive development, experts anticipate few concrete outcomes and potentially major downsides in terms of hard rhetoric from Beijing and pushback on issues like overcapacity. Paul Triolo, associate partner for China at Albright Stonebridge Group, noted, "Industry will be looking for how Chinese officials like Vice Premier He Lifeng react to Yellen's messages on both export controls and overcapacity."
Yellen's trip is part of a broader effort to restart dialogue between the two countries after a period of heightened tensions, particularly over Taiwan and the South China Sea. Her July 2023 visit helped reestablish communication and led to the creation of bilateral working groups on economic and financial policy. U.S. Secretary of State Antony Blinken is also expected to make another China trip in the coming weeks, signaling that both sides are returning to more routine engagements.
