Washington and others are worried that increased capacity, backed by the Chinese government, could lead to a surge in Chinese exports at artificially low prices, hurting companies elsewhere in new industries such as electric vehicles and solar energy.
But Beijing has rejected such warnings, with one minister calling them “baseless”.
Business leaders see Yellen's visit as aimed at finding solutions with counterparts, while analysts warn it could pave the way for action like tariffs.
For now, Yellen said the concerns “will not be resolved in a week or a month”.
His arrival in Guangzhou created a buzz, with social media users noting how he took his bag down from the plane to welcome Chinese officials. The focus then turned to his food, with the US policymaker spotted at a popular Guangzhou dim sum eatery and a restaurant. Cuisine typical of southwestern Sichuan province. But beyond quips about chopstick use, his meetings took on a somber tone as he warned that China's industrial subsidies could risk “global economic dislocation.”
escape the spiral
“It's important that governments have these discussions before they take on a life of their own, get out of control and things spiral into a negative spiral,” said Jens Eskelund, president of the European Union Chamber of Commerce in China.
But he told AFP it might be “too optimistic” to hope for a quick solution.
Politically incentivized growth in industrial production could become a “zero-sum game” with low demand growth in China and around the world if it replaces domestic production and jobs in other economies, he said. .
Washington and Beijing have agreed to talks on “macroeconomic imbalances” to discuss overcapacity, and Esklund said similar discussions should also take place in the EU-China context.
It's also important to let Beijing know that the U.S. and allies recognize that excess capacity could be a problem, said Sean Stein, president of the American Chamber of Commerce in China.
“If it later becomes necessary to take action to reduce the increase in Chinese exports, the Chinese cannot say they were not warned,” Stein said.
personal relationships
Stein described Yellen as her best bet to help move the needle on China policy and make a persuasive argument for reform — particularly on trade and economic issues.
“The Chinese see Yellen not as a politician, but as an economist considering issues,” he said.
The development of personal relationships between Yellen and her counterpart He Lifeng, the top official overseeing China's economic and financial policy, is another factor.
By far, his longest engagements were with her in travel. From group meetings to a boat trip, they spent more than 11 hours discussing everything from their respective economies to concerns about national security operations.
Ryan Haas, a senior fellow at Brookings, said every major U.S.-China problem that has been solved or effectively managed over the past 45 years has been handled by senior officials who “built personal relationships and listened to each other's needs.” and developed an understanding of boundaries”.
'A comprehensive strategy'
Haas told AFP that Yellen's visit was not designed to deliver “key results”.
He explained “this is part of a broader strategy” toward cooperation in areas such as illicit finance and climate finance, as well as President Joe Biden's steps to protect US national security.
The trip reflects the Biden administration's efforts to manage relations diplomatically, Haas said, adding that many American voters support high-level talks with China.
But one likely outcome is “more tariffs, or at least investigations that could pave the way for more tariffs,” said Ilaria Mazzocco, a senior fellow at the Center for Strategic and International Studies.
He said given the common ground between the United States and Europe on excess capacity, further joint responses could be negotiated.
“For now it seems the government's solution is to at least encourage companies in the battery and EV sector to invest more in production facilities outside China as a way to ease tensions,” Mazzocco said.
But this may not be enough to solve the problems with Washington.
With the US presidential election looming, Rory Daniels, managing director of the Asia Society Policy Institute, expects Chinese action on US demands not necessarily dependent on the outcome.
“Much more can be done to address American concerns over excess industrial capacity and debt restructuring for a second Biden or Trump second term,” he said.