Yellen Warns China Industrial Subsidies Pose Risk To World Economy

US Treasury chief Janet Yellen warned during a visit to China on Friday that Beijing's subsidies for industry could pose a risk to global economic resilience.

Yellen arrived in the southern city of Guangzhou on Thursday for several days of talks with Chinese officials on her second visit to the world's second-largest economy in less than a year.

She expressed concerns about China's "overcapacity" undercutting American and other countries' companies. Such overcapacity is seen as a result of huge Chinese subsidies to industries, such as solar, electric vehicles and batteries, that risk creating a surplus of cheap goods that threatens those sectors elsewhere.

"Direct and indirect government support is currently leading to production capacity that significantly exceeds China's domestic demand, as well as what the global market can bear," she told a gathering of the US business community in Guangzhou on Friday.

"Overcapacity can lead to large volumes of exports at depressed prices," she said.

"And it can lead to overconcentration of supply chains, posing a risk to global economic resilience."

Such fears are not part of an "anti-China policy", she said during a question-and-answer session after the speech, but are intended to mitigate risks from "inevitable global economic dislocation that will result" from no change in Chinese policies.

Washington instead seeks to manage US-China ties so that they are "resilient" and can "withstand shocks and challenging circumstances".

Yellen also told the gathering, organised by the US Chamber of Commerce in China, that she would seek to raise with Chinese officials the "challenges" faced by US businesses operating in the country.

That included Beijing "imposing barriers to access for foreign firms and taking coercive actions against American companies", she said.

"I strongly believe that this doesn't only hurt these American firms: ending these unfair practices would benefit China by improving the business climate here," Yellen said.

Yellen is set to meet with Vice Premier He Lifeng later on Friday.

The United States has said talks with He will see the two dive deep into both countries' economic conditions and address more sensitive areas such as national security and Beijing's alleged support for Russia's defence industrial base.

Yellen in the morning told the governor of Guangdong -- a vast province emblematic of the reforms and development that drove China's breakneck growth -- that the United States was committed to a "healthy economic relationship".

But, she stressed, that required "a level playing field for American workers and firms", as well as "open and direct communication on areas where we disagree".

Beijing has dismissed concerns over its vast state support for industry, last month condemning an EU probe into its subsidies for EVs as "protectionism" and part of a Western effort to politicise international trade.

Washington's worries about a flood of exports come as US President Joe Biden pushes to boost domestic manufacturing in clean energy, with policymakers warning that China's excess capacity could harm the growth of those industries.

The Biden administration is very sensitive to the US auto industry's concerns about China and EVs, especially in an election year, said Paul Triolo, associate partner for China at Albright Stonebridge Group.

"It is likely that the administration will take some action to show it is willing to act pre-emptively to prevent future problems from China's overcapacity in EVs," he told AFP.

But he warned that Beijing would likely "react badly", given that the impact on US automakers remains to be seen.

Yellen also plans to meet Chinese Premier Li Qiang during her trip, as well as central bank governor Pan Gongsheng and Finance Minister Lan Fo'an.

Beijing and Washington have clashed in recent years on flashpoint issues ranging from technology and trade to human rights, as well as over the self-ruled island of Taiwan and the South China Sea.

Relations have stabilised somewhat since Biden and his Chinese counterpart Xi Jinping met in San Francisco in November for talks that both sides described as a qualified success.

Yellen's July 2023 visit helped restart dialogue after a period of heightened tensions, notably over Taiwan, and culminated in the launching of bilateral working groups on economic and financial policy.

US Secretary of State Antony Blinken is also expected to make another China trip in the coming weeks, a sign that both sides are returning to more routine engagements.