October 23, 2024 – U.S. Treasury Secretary Janet Yellen and International Monetary Fund (IMF) Chief Economist Pierre-Olivier Gourinchas both stated that the latest economic policies from the Chinese Communist Party (CCP) have failed to effectively stimulate domestic demand, and this issue remains a significant factor in U.S.-China trade tensions.

On Tuesday (October 22), both Yellen and Gourinchas expressed that, so far, they have not seen any measures from the CCP capable of stimulating demand, absorbing excess capacity, and promoting economic growth.

During a press conference marking the start of the IMF and World Bank annual meetings in Washington, Yellen said, “We believe that increasing the share of consumer spending in China’s GDP is crucial, and steps need to be taken to address the problems in the real estate sector.”

She emphasized, “So far, I don’t think we’ve seen any policies from China that can address these issues.”

At a press conference for the IMF’s latest economic forecast, Gourinchas mentioned that the fiscal stimulus measures announced by the Chinese authorities so far lack sufficient details, which is why they have not been factored into the IMF’s growth forecast for China. The forecast has been revised down by 0.2 percentage points to 4.8%.

He added that the monetary policy announced last month by the People’s Bank of China, aimed at boosting lending, would likely have little substantive effect on economic growth.

In an earlier interview with Reuters, Gourinchas stated that China’s subsidy policies might distort certain industries, but excess capacity is not the main reason for China’s increasing exports and trade surplus.

He believes that insufficient domestic demand, combined with strong U.S. consumer demand and other macroeconomic factors, is the primary driver of China’s trade surplus. The biggest factor is the low level of consumer spending in China, along with the real estate market crisis that has diminished the wealth of many Chinese households, pushing excess capacity toward exports.

Yellen’s Warning

While Yellen agreed that boosting Chinese consumer spending and reducing savings rates is necessary, she took a tougher stance on China’s excess industrial capacity.

She noted that “very large” subsidies pose a threat to U.S. manufacturing jobs, particularly in sectors such as electric vehicles, batteries, solar cells, and semiconductors. Last month, the U.S. significantly raised tariffs on these products.

Yellen said that next week, the U.S.-China Financial Working Group will meet in Washington, where the U.S. hopes to reach some consensus on China’s industrial capacity.

Gourinchas acknowledged that Chinese subsidies do affect certain industries and could distort trade. The IMF is working to assess the impact of industrial subsidies, but transparency in China remains a challenge.

He explained that support measures are often not broken down into specific categories, making it difficult to accurately track government spending.

Gourinchas believes that the most effective way to reduce the U.S.-China trade imbalance is to boost domestic demand in China, which would absorb the capacity currently used for exports.

“We need to give Chinese households and businesses the confidence to increase consumption and investment and reduce savings,” Gourinchas said. This would require developing a social safety net that provides retirement security for the elderly and healthcare coverage, among other things.

Gourinchas also suggested that the U.S. should tighten fiscal policy to curb excess demand and reduce imports from China. The IMF has long advocated that Washington raise taxes and gradually reduce federal debt.

(This article references reporting from Reuters.)

Editor: Li Muen