Yellen warns China industrial subsidies pose risk to world economy

BEIJING

U.S. Treasury chief Janet Yellen warned during a visit to China on April 5 that Beijing's subsidies for industry could pose a risk to global economic resilience.

Yellen arrived in the city of Guangzhou on April 4 for several days of talks with Chinese officials on what is her second visit to the world's number two economy in less than a year.

Speaking on April 5, she expressed concerns about China's "overcapacity" that its huge subsidies for industry risk creating an excess of goods that then flood global markets, undercutting American and other countries' firms.

"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 American business community in the city.

"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."

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 U.S. 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."

"This includes the issue of China's industrial overcapacity, which the United States and other countries are concerned can cause global spillovers," she said.

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 U.S. 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 U.S. 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 the impact on U.S. automakers remains to be seen.

During her trip, Yellen plans to meet with Chinese Premier Li Qiang and Vice Premier He Lifeng, as well as central bank governor Pan Gongsheng and Finance Minister Lan Fo'an.

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.