Treasury Secretary Yellen Visited China To Discuss Investment Risks

From July 6th through July 9th, US Treasury Secretary Janet Yellen traveled to Beijing to discuss issues relevant to the US-China relationship. Although the deliverables from Yellen were limited, the US side remains committed to strengthening diplomacy vis-a-vis high-level visits to China. Through these cabinet delegations to China, the US seeks to put a “floor” under the relationship and build positive momentum for a likely President Xi Jinping visit to the United States for APEC in November.

Why Did Janet Yellen Visit China?

One agreement that resulted from the Xi-Biden summit in Bali and the subsequent visit of Secretary of State Blinken to Beijing was to re-establish regular communication at a senior level. This in particular led to Biden dispatching Secretary Yellen on an official visit to Beijing.

Moreover, traditionally and historically speaking, US Treasury Secretaries have always played a positive role in the US-China relationship, particularly as it relates to facilitating cross-border trade and investment and fostering a positive business environment between the two countries.

But, the current state of US-China relations is bleak, thus, Secretary Yellen was the go-to person to visit China in an attempt to make headway on the bilateral relationship. Her primary goals were to calm down tensions, meet with her Chinese economic counterparts, and discuss how the US and China can work together on global economic and financial challenges.

Within the administration, Yellen is viewed as less hawkish than others, favoring a balanced approach that recognizes the importance of measures to protect national security but also values the win-win nature of trade and investment with China. Therefore, Yellen visited Beijing to get a feel for the Chinese government’s appetite when it comes to stabilizing the economy.

What Were The Outcomes?

First and foremost, the re-establishment of regular communication at a senior level can be seen as the main accomplishment of the trip. Hence, Secretary Yellen’s visit to Beijing went as expected as both sides deliberately played down expectations of delivering concrete outcomes.

There were no major outcomes in terms of policy changes on either side, but the cordial meetings contributed to a sense that the relationship will not spiral down toward conflict. Yellen met the four key economic officials she will be dealing with, all of whom are new since a Treasury Secretary last traveled to Beijing. Yellen walked a careful line of raising some issues where the two sides disagree but also went out of her way to emphasize that there’s still a lot of room for win-win trade and investment between the two biggest economies in the world.

On the economic front, China’s economy continues to slow down. In particular, the non-manufacturing PMI dropped to 53.2 in June, from 54.5 in May and 56.4 in April. This is still in expansion territory, but the steady decline is a sign that the post-COVID consumption boom is losing steam. The manufacturing PMI ticked up in June (to 49.0 from 48.8 in May) but remains in contraction territory. China wants to assure investors – foreign and domestic – that the relationship with the US is not going to spiral downward, and the visit achieved that.

In addition, Chinese policymakers are concerned about the Fed’s continuing campaign to raise interest rates, which is one factor contributing to the depreciation of the Chinese currency. Chinese leaders have said publicly that the Fed should be mindful of the effects on the developing world, and probably they reiterated this message to Yellen. Therefore, Yellen in turn likely encouraged China to increase fiscal stimulus aimed at consumption (tax breaks and enhanced social spending). For China to stimulate exports through currency depreciation is unhelpful as the whole world economy slows down.

On the American front, the US is also playing to various audiences. In particular, many of America’s partners do not want complete de-coupling from China, and Yellen was the right Secretary to deliver the message that the US and China still have a lot of trade and investment and that the US is not trying to contain China. Therefore, the US strategy of maintaining a tough national security line on China while cooperating on some global issues seems to be working, despite Chinese protestations that issues cannot be compartmentalized in this way. For example, China recently agreed to debt rescheduling for Zambia, coordinated with other official creditors, and backed by a new IMF program. China did not want to be seen as the lone hold-out causing misery in Zambia, not to mention its interest in getting something rather than nothing back from its loans. Yellen’s successful trip makes collaboration on debt issues of other developing countries more likely.

Concerning areas of disagreement, Yellen defended US technology controls as narrowly targeted and necessary for national security. She argued that they’re not aimed at holding China down economically. As a result, the administration will soon roll out targeted investment restrictions limiting American investment in hi-tech sectors. This EO is more likely to be narrowly focused on a few specific sectors such as semiconductors and AI, rather than broadly aimed at all tech. Furthermore, it will probably target direct (controlling) investments and not portfolio investments in Chinese companies’ stocks and bonds.  

Also, on the 25% tariffs aimed at about half of what the US imports from China – which are clearly not narrowly targeted – Yellen repeated the administration line that any change in the tariffs is pending USTR review. It’s highly unlikely that the administration would reduce these tariffs before the presidential election as this is a contentious political issue.

These areas of disagreement follow in line with prior remarks by Yellen. For example, in an earlier speech on China, Yellen said that “our economic relationship with China…will be collaborative where it can be and adversarial where it must be.” Policies under Trump and so far Biden have been long on adversarial and short on collaborative. The resumption of regular dialogue at a senior level should result in some shift towards collaborative actions. For example, initially, debt relief for poor countries, reform of the International Financial Institutions, and climate change are the most promising areas for collaboration. If Biden wins a second term, there may be some scope to reduce the tariffs aimed at China but this will probably be hotly debated within the administration.

Conclusion

Janet Yellen’s visit to Beijing is second in line following Secretary of State Blinken, and will likely be followed by a visit by Commerce Secretary Raimondo. This ordering of visitations is significant as it reflects the priorities of the Biden Administration and sheds light on whether the administration will lean more hawkish or dovish in the future.

For businesses, the stock market, and the global economic recovery, this visit will likely provide a brief spurt of positive momentum as the Biden administration seeks to consolidate a less aggressive attitude towards Beijing. However, it’s still unknown how friendly the Xi government will respond. Most likely, Beijing will continue to move forward aggressively with anti-market policies and targeting foreign firms operating in China. Hence, the results will likely be mixed and the current trajectory of US-China relations and the global economic situation will remain unchanged.