US’s Yellen warns China it cannot export its way to rapid growth

US treasury secretary says market-based reforms will aid world’s second largest economy.

United States Treasury Secretary Janet Yellen has warned that China is too large to try to export its way to rapid growth and would benefit by reducing excess industrial capacity that is pressuring other economies.

Yellen said on Friday during a visit to China that she understands that Beijing’s direct and indirect government support for manufacturing is linked to domestic development objectives.

But she told an American Chamber of Commerce in China-hosted gathering in Guangzhou that state subsidies were “leading to production capacity that significantly exceeds China’s domestic demand, as well as what the global market can bear”.

Yellen’s comments underscored her main objective in talks later on Friday with Chinese Vice Premier He Lifeng – to point out the problems that China’s excess factory capacity and growing exports are causing abroad, increasing potential trade tensions.

Premier Li Qiang in March set an ambitious growth target of 5 percent for 2024, fuelled in part by more investment in new high-technology sectors as China struggles to overcome a property crisis and weak consumer demand.

The International Monetary Fund currently forecasts China’s 2024 real gross domestic product (GDP) growth at 4.6 percent, falling to 4.1 percent in 2025.

Yellen said excess manufacturing capacity in China has been a problem in the past, but it has recently intensified with emerging risks in new sectors such as electric vehicles (EVs), batteries and solar energy products, undercutting competing workers and businesses in the US, Mexico and India.

“I believe that addressing over capacity, and more generally considering market-based reforms, is in China’s interest,” she said.

She drew parallels to China’s market-based reforms of past decades, which spurred growth that lifted hundreds of millions of people out of poverty, and said more gains could be made by reviving them.

Yellen also said she would raise concerns voiced by American and international companies about a deteriorating business climate in China, including “unfair treatment compared to local competitors”.