Mission Impossible? Yellen visits China to ease tensions amid deep divisions

The Biden administration is mulling further controls on advanced chips and on US investment into cutting-edge Chinese technology.

Semiconductors have always been one of the biggest and most valuable categories of US exports to China, and while the Chinese government is investing heavily in its domestic capacity, it remains many years behind the United States.

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The Biden administration’s subsidy program to strengthen the US semiconductor industry has also rankled Chinese officials, especially since it includes restrictions on investing in China. Companies that accept US government money to build new chip facilities in the United States are forbidden to make new, high-tech investments in China.

And while Chinese officials — and some American manufacturers — were hopeful that the Biden administration would lift tariffs on hundreds of billions of dollars of Chinese imports, that does not seem to be in the offing. While Yellen has questioned the efficacy of tariffs, other top officials in the administration see the levies as helpful for encouraging supply chains to move out of China.

The administration is employing both carrots and sticks to carry out a policy of “de-risking” or “friend-shoring” — that is, enticing supply chains for crucial products like electric vehicle batteries, semiconductors and solar panels out of China.

Deteriorating business environments

Companies doing business in China are increasingly worried about attracting negative attention from the government. The most recent target was Micron Technology, a US memory chipmaker that failed a Chinese security review in May. The move could cut Micron off from selling to Chinese companies that operate key infrastructure, putting roughly one-eighth of the company’s global revenue at risk. In recent months, consulting and advisory firms in China with foreign ties have faced a crackdown.

US officials are growing more concerned with the Chinese government’s use of economic coercion against countries like Australia and Lithuania, and they are working with European officials and other governments to coordinate their responses.

Businesses are also alarmed by China’s ever-tightening national security laws, which include a stringent counterespionage law that took effect on Saturday. Foreign businesses in China are reassessing their activities and the market information they gather because the law is vague about what is prohibited.

“We think this is very ill-advised, and we’ve made that point to several members of the government here,” said R. Nicholas Burns, the US ambassador to China, in an interview in Beijing.

In the United States, companies with ties to China, like the social media app TikTok, the shopping app Temu and the clothing retailer Shein, are facing increasing scrutiny over their labour practices, their use of customer data and the ways they import products into the United States.

Currency

China’s currency, the renminbi, has often been a source of concern for US officials, who have at times accused Beijing of artificially weakening its currency to make its products cheaper to sell abroad.

The renminbi’s recent weakness may pose the most difficult issue for Yellen. The currency is down more than 7 per cent against the dollar in the past 12 months and down nearly 13 per cent against the euro. That decline makes China’s exports more competitive in the United States. China’s trade surplus in manufactured goods already represents one-tenth of the entire economy’s output.

The renminbi is not alone in falling against the US dollar lately — the Japanese yen has tumbled for various reasons, including rising interest rates in the United States as the Federal Reserve tries to tamp down inflation.

Chinese economists have blamed that factor for the renminbi’s weakness as well. Zhan Yubo, a senior economist at the Shanghai Academy of Social Sciences, said the decline in the renminbi was the direct result of the Fed’s recent increases in interest rates.

Global debt

China has provided more than $US500 billion to developing countries through its lending program, making it one of the world’s largest creditors. Many of those borrowers, including several African nations, have struggled economically since the pandemic and face the possibility of defaulting on their debt payments.

The United States, along with other Western nations, has been pressing China to allow some of those countries to restructure their debt and reduce the amount that they owe. But for more than two years, China has insisted that other creditors and multilateral lenders absorb financial losses as part of any restructuring, bogging down the loan relief process and threatening to push millions of people in developing countries deeper into poverty.

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In June, international creditors including China agreed to a debt relief plan with Zambia that would provide a grace period on its interest payments and extend the dates when its loans are due. The arrangement did not require that the World Bank or International Monetary Fund write off any debts, offering global policymakers like Yellen hope for similar debt restructuring in poorer countries.

Human rights and national security issues

Tensions over national security and human rights have created an atmosphere of mutual distrust and spilled over into economic relations. The flight of a Chinese surveillance balloon across the United States this year deeply unsettled the American public, and members of Congress have been pressing the administration to reveal more of what it knows about the balloon. Biden’s recent labelling of China’s leader, Xi Jinping, as a “dictator” also rankled Chinese officials and state-run media.

US officials continue to be concerned about China’s human rights violations, including the suppression of the democracy movement in Hong Kong and the detention of mainly Muslim ethnic minorities in the Xinjiang region of northwestern China. A senior Treasury Department official, speaking on the condition of anonymity before Yellen’s trip, said the United States had no intention of shying away from its views on human rights during the meetings in China.

Chinese officials continue to protest the various sanctions that the United States has issued against Chinese companies, organisations and individuals for national security threats and human rights violations — including sanctions against Li Shangfu, China’s defence minister. The Chinese government has cited those sanctions as a reason for its rejection of high-level military dialogues.

This article originally appeared in The New York Times.

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