Three cheers! Janet Yellen goes to Beijing

Time for dialogue and turning down the temperature

US Treasury Secretary Janet Yellen is taking her first pilgrimage to Beijing on 6-9 July. Perhaps little more than meeting key counterparts and a frank airing of views is achievable. Still, this trip is a positive development for the US, China and the world at large.

In April 2021, Yellen said: ‘Our economic relationship with China, like our broader relationship with China, will be competitive where it should be, collaborative where it can be and adversarial where it must be.’ To date, President Joe Biden’s administration’s economic relationship with China, like its predecessor, has been long on ‘adversarial’ and short on ‘collaborative’. China’s relationship with the US is no different.

China most likely sees in Yellen a non-polarising figure with a record as an academic, Federal Reserve chair and technocrat. The contrast cannot be lost on either side between today’s limited dialogue and the George W. Bush and Barack Obama eras when daily engagement with Beijing occurred at all Treasury levels. Yellen will serve to ameliorate the economic dialogue and remind both sides that the US, China and the world will suffer absent more co-operation.

Yellen can now meet with Chinese central bank and finance ministry counterparts at G20 and International Monetary Fund gatherings, though such talks were hampered due to the pandemic. However, visiting Beijing is especially needed to meet her counterpart – Vice Premier He Lifeng – and other higher-ups influential in shaping US-China ties.

Yet a fraught agenda faces Yellen, having said that US national security actions are not designed to gain competitive economic advantage or stifle China’s economic and technological modernisation. She’ll have a tough time convincing Beijing.

Many US actions concerning China may be merited. But China has ample reason to perceive the US as pursuing ‘containment’. This is given the harsh rhetoric across the US political spectrum, proliferating sanctions, semiconductor chip actions, the expanding entities list, the role of the Committee on Foreign Investment in the US (which the Treasury chairs), the emphasis on ‘friend-shoring’ and suspicions that ‘de-risking’ is a euphemism for ‘decoupling’. Forthcoming outbound US investment restrictions and the blocking of Russian assets are surely on China’s radar.

While China says it wants foreign investment on its own terms, that’s hard to square with such practices as forced technology transfer, intellectual property theft, rectification and disregard for property rights. Other areas – though difficult – offer grounds for more fruitful conversation.

Macroeconomic dialogue is key. The US and China account for 40% of global gross domestic product. The US economy is softening, though not as much as expected, given labour market resilience amid persistently above-target inflation and Fed rate hikes. China holds US assets and US default or government shutdown threats are of clear interest.

China’s rebound this year is not as robust as previously expected. Fiscal support is limited and the central bank is cautiously pursuing more accommodative policies, due to enormous headwinds of property sector woes, strained local government finances, high leverage and more. Given monetary policy divergences, the renminbi is weakening and the People’s Bank of China is acting to restrain depreciation pressures.

These developments raise questions about global growth and US concerns that China might rely on increased exports to support its economy – causing intensified discord. For their own good – and the globe’s, which has a vital stake in the G2 relationship – both sides need to understand the other’s macroeconomic policy thinking.

Low-income country debt, and that in Sri Lanka, Pakistan and Ghana, etc. will be front and centre. China wonders why it should offer deep debt relief when it is frequently the dominant creditor and prefers case-by-case debt extensions that minimise net present value losses over haircuts. The recent Zambian restructuring agreement is, at long last, a win for the G20 common framework. But it must be finalised in a memorandum of understanding and the jury is out on whether the deal will afford deep debt reduction and what it means for future cases. Meanwhile, the US has little leverage, given US-China tensions and Chinese perceptions that US officials seek to pin ‘debt trap diplomacy’ on China.

Yellen will hopefully change the narrative, assuring the US interest is about helping distressed countries, not stigmatising China.

Global governance and the role of the IMF and the World Bank should be raised. Both the US and China share a self-interest in promoting a central IMF that is able to foster stability when countries face stresses. Yet, China is number three in the IMF – with a woefully underrepresented 6% vote share, versus a global GDP weight well above 15%. It should be number two. Efforts to increase and realign quotas are stalled, especially as the US is unlikely able to support such action given US-China tensions and looming 2024 elections.

The US is focused on scaling up multilateral development bank lending to help tackle climate change through expanded balance sheet leverage. China most likely has little problem with that. But tackling global climate requires trillions of dollars and many developing countries are concerned traditional lending could be diverted. Thus, China will understandably ask why the US is not supporting MDB general capital increases, especially as these would boost China’s MDB voting power.

These are but several items on the docket. The talks will be tough. Much is at stake. But Yellen’s trip is a step forward for US-China co-operation and engagement.

Mark Sobel is US Chairman of OMFIF.

Image source: European Central Bank

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