For decades, the U.S. Treasury has played an essential role in stabilizing U.S.-China relations, to the applause of those who favor engagement and the consternation of those who don’t. That’s true in the Biden Treasury as well. Treasury has helped ease tensions with Beijing through visits by Secretary Janet Yellen and regular meetings of U.S.-China economic working groups. Jay Shambaugh, Treasury’s undersecretary for international affairs, leads one of those working groups and recently returned from a trip to China with Yellen. Prior to joining the Treasury in early 2023, Shambaugh was an international economist at George Washington University and focused on currencies, exchange rates, and macroeconomics. During the Obama administration, he was chief economist at the White House’s Council of Economic Advisers. He also spent three years as director of the Hamilton Project, an economic policy group at the Brookings Institution. This interview is part of Rules of Engagement, a series by Bob Davis, who covered the U.S.-China relationship at The Wall Street Journal starting in the 1990s. In these interviews, Davis asks current and former U.S. officials and policymakers what went right, what went wrong and what comes next.

Illustration by Kate Copeland
Q: You just came back from the fourth meeting between Treasury Secretary Yellen and her Chinese counterpart account. What was your big takeaway?
A: This latest trip, we were really able to dig into substance and have substantial conversations. Especially if you compare the three previous meetings with Vice Premier He Lifeng, I would say there was less reading of talking points. In the first one, there was some back and forth, but by San Francisco [when Yellen and He met in November 2023, around the meeting of the Asia Pacific Economic Cooperation forum] there was a lot less. And by their meeting in Guangzhou in April they were able to just talk more, especially in one-on-one type settings, or even in a smaller group.
There was a lot more going back and forth over issues — not really fighting over them, but actually engaging with each other’s opinions as opposed to stating your own opinions. I think that’s important. When we have a different perspective, it’s really helpful to be able to state what we think and have them actually respond to what we’re saying.
We also have met twice with Premier Li Qiang. This second meeting was far more substantial. It was less of a polite meet-and-greet and more of a talk about a few issues. Last July [in Beijing], the secretary certainly raised what we thought were important issues. But this time they talked more about the important issues. The premier doesn’t really use points very much at all.
I don’t suggest that He Lifeng freelances and riffs. Everyone has their points in front of them. It’s more that there’s a kind of a call-and-response after [one side makes a point] as opposed to strictly each side having a point of view.
If tomorrow there were a global financial crisis, are you confident that the U.S. and China would be able to work together the way they did in 2009?
I think there is a level of communication we’ve established, of knowing who to call. I talk to my counterpart, [Liao Min], who is the vice minister at the Ministry of Finance pretty frequently. And I see him quite frequently because we’re both G-20 deputies. We also schedule calls partly in preparation for big meetings and partly for the working groups. [During the past year, the U.S. and China have established separate working groups on the economy and finance.]
Now we could get on the phone quite quickly. That wouldn’t be the key channel, but it would be the first step. The secretary and vice premier certainly would have a conversation about an important issue at the drop of a hat if they needed to.
One of the outcomes of the financial working group was to do a technical exercise between regulatory staffs about what would happen if a G-SIB fails [Global Systemically Important Bank] — not specifying in which country, or not suggesting any one bank in any one country is at risk. That’s the same thing we do with Europe, the UK, and Japan. They ran kind of a mini-version of one of those exercises with China.
That includes who needs to pick up a phone? What’s the name? What’s the office? Who should talk to whom? All of that. That came out of the financial working group, and I think that was really important. They’ve done a few different technical exercises on different types of things. To me, that falls under what we like to sometimes refer to as ‘responsibly managing the relationship.’ The two largest countries should be able to talk about things.
In the Trump administration, faced with the worst pandemic in a century, the two countries didn’t work together whatsoever. Talking is fine, but in that exercise was the assumption that the two countries would work together to help deal with the problem?
The assumption is that we recognize that financial crises don’t stay in any one country. We have interlinked banking systems and financial systems. Our exposure isn’t massive to China and vice versa. But if a U.S. bank that has operations in China got in trouble or a Chinese bank that has operations in the U.S. got in trouble, we need to be able to figure out how to unwind those issues. We’ve made some important progress in terms of being ready to take the steps that two big countries should be able to take.
Is there any overlap between improving relations economically and other issues that keep the two countries apart, especially national security issues like the South China Sea or Taiwan?
I don’t know that I’d say there are huge spillovers. And I want to be clear that even within the economic sphere, we have plenty of disagreements. We’ve tried to set up a structure where we can have conversations about the hard things.
Having some connective tissue, having kind of a floor in the relationship, and adding some stability to the relationship should in theory be helpful. To the things that aren’t directly in my area, I don’t want to speculate as to how much that’s helpful. But in general, having these two big countries able to talk to each other is important. If the economic channel can provide a little bit of that connection, that’s useful.
Most of the coverage out of the meeting was about China’s excess capacity in clean technology products. Was that the heart of what you were discussing?
That was a big piece of it. When I was in China in February for the economic working group, we tried to tee this up a little bit and had pretty in-the-weeds conversations about it so that the principals weren’t just talking in vague terms. This is something the secretary had talked about a little bit with her Chinese counterparts previously, but we really wanted to make sure that this time we could really get into the issue. We were able to do that. We spoke for probably over two hours in one stretch on that topic alone. The secretary also raised it with the premier and he happily engaged on it and talked a lot.

It’s a complicated issue. It touches on macroeconomic imbalance issues, including a savings rate that is really high. If investment is high, all in manufacturing, you’re probably going to start building up a lot of capacity in those areas.
Part of it is also industrial policy and the structure of the economy. If the State Council says, ‘Go forth in these handful of industries,’ every province wants to start up their own activity in those industries. Then maybe you aren’t really responding to market signals. You have firms that are producing at a loss but staying in business, and that can lead to a situation where you have overcapacity in an industry.
We wanted to talk about that broad suite of issues. And I think we were successful in making sure the Chinese understand why we’re concerned and what we’re concerned about. A pretty important part of the process is making sure at the highest levels that this is something we really care about — right up to the premier and the vice premier who runs economic policy.
They’re pushing on the boundaries of what the rest of the world is going to be able to accommodate. When you’re 30 percent of world manufacturing and you’re growing at a really fast rate, you’re displacing others.
We tried to make sure they understood that the Europeans also are raising this issue, and a host of emerging market countries are putting anti-dumping tariffs on Chinese goods because they say, ‘You’re selling at a loss.’ We wanted to make sure we were clear that this isn’t an anti-China thing. This isn’t us trying to hold back their growth. This is us trying to communicate the spillovers of what they’re doing to the rest of us, and that the rest of us may respond to those spillovers.
Vice Minister of Finance Liao Min and his team are coming this week as part of the economic working group. Where do you take it from here?

One of the outcomes of our meeting in China was that we called an ‘intensive exchange on balanced growth in the domestic and global economies.’ From our perspective, that touches on imbalances in an economy and how that spills over around the globe. This will be the first meeting. We’ve already talked about these issues to some extent at the last economic working group meeting. We were all there for the meetings in Guangzhou too. Now we can dig in and say how are we going to use this exchange? What process can we go forward with that might make some progress?
The Chinese are always happy to talk. There was the Strategic and Economic Dialogue in the Bush and Obama administrations. This effort reminds me of something further back when the U.S. worried about Japan. It was called the Structural Impediments Initiative. The Japanese were happy to talk about the problems in their economy and problems in the U.S. economy. But it didn’t lead anywhere. Are you worried about getting sucked into endless discussions that don’t lead to any concrete results?
One always has to be aware that you don’t want dialogues that lead to delays and don’t do anything. Going into one of these processes with your eyes wide open as to what it might accomplish, but what it might not accomplish is important. The secretary said we would keep all options on the table. We’re trying to be very deliberate that we’re not turning this into some sort of filibuster.

But at the same time, we think there’s a point to talking. We think it’s useful to try to work through with the Chinese how we see the spillovers, where we see the spillovers coming from, how specific policies of theirs are driving this, and whether there’s any way to nudge the system in a different direction. The only way you nudge the Chinese system is by having that conversation at the very top.
That’s why talking to the premier was really important. The premier welcomed the fact that we were having this working group. He said this is important, and this working group should go forward and make progress on this issue. In the Chinese system, having permission from high up is really important. We’re going to see if we can do anything productive with it.
BIO AT A GLANCE | |
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AGE | 54 |
BIRTHPLACE | Huntington, NY, USA |
CURRENT POSITION | Under Secretary for International Affairs, U.S. Treasury |
What criticisms of the U.S. economy did they bring up?
In the context of balanced growth, they didn’t raise too much. They sometimes talk about us having a large budget deficit. From our perspective we can say the president’s budget has something like $3 trillion in deficit reduction over a decade. Our intention is to bring the deficit down.
And we can say what are your plans? How do you plan to raise household consumption? How do you plan to fix the imbalances that we see and not have 25 percent year-on-year loan growth to manufacturing year after year after year, when you already have 30 percent of the world’s manufacturing? That’s how we’ll try to approach it.
After the meetings, Liao Min said well, we don’t really have a problem. Was that his response in the meeting?

I understand every country sometimes makes an outward response. I would say that we were able to have constructive conversations. The Chinese system has in many places acknowledged overcapacity. In a December report, they talked about overcapacity in some industries. In March they talked about risks of overcapacity in some industries. This isn’t new. It happened in the 2014-2016 period with steel. They quite deliberately acknowledged overcapacity. But the adjustment there took too a long time and the spillovers to the rest of the world were pretty extreme.
One of the things we’re trying to do here is head that off and say, ‘You have to get in front of the problem this time.’ You can’t just watch the spillovers wash over the globe, and then say, ‘Oh, we should probably undertake a four-year process to deal with this.’

He Lifeng is an interesting guy to be talking about this issue. He was the head of the National Development and Reform Commission [the successor to the state planning agency]. At the time they tried to reduce steel overcapacity. But local governments frustrated the central government time and time again because they didn’t want to lose the employment or tax revenue from shutting down steel plants. Do you get a sense now with clean energy whether overcapacity is due to an effort by the central government to push production, or an inability to crack down on local governments that are operating on their own behalf?
The central government certainly has tools to shape the behavior of the local governments. Part of what the local governments are doing is responding to incentives from the top saying these are areas we want to see growth. Then everybody wants to be the best. They all want to be the lead province, so they all try to do the same thing. But that’s not responding to market signals.
The share of money-losing firms in China is as high as it’s been in decades. That to me is a signal that you’ve got firms that are not really responding to what the market will bear and instead are taking action to try to accomplish political goals. Our hope would be that you could get a little bit more direction from the top to not all do the same thing.

So, are you hoping that the central government will cull out money-losing firms in batteries or solar?
Local government finances have been a challenge lately. I think them reminding the local governments that they’re not going to bail them out if they’re losing money for providing too many incentives to local firms would be helpful.

The other issue that is a central government issue is the lack of household consumption. That’s more of a standard rebalancing. Now the money seems to be moving towards loans to manufacturing. If they were to do more to shift where income goes — from the corporate sector to households — that would be one way to lift household consumption. Hukou reform would give the migrant workers more stability which would probably lift their consumption. [The so-called hukou system is a kind of permanent residence system. Without the proper hukou, migrants aren’t legally permitted to live in major cities and are often exploited when they do so anyway.]
Obviously building out your social safety net reduces precautionary savings too. That’s a harder and longer-term process. That’s not something that switches on or off in a day, or frankly in a year, but it’s a process we would like to encourage.
I have heard the same recommendations from many of your predecessors. And I think many of the people in the Ministry of Finance and the People’s Bank of China would agree with that. But it doesn’t get done. Under Xi Jinping, there’s also less sympathy toward that view because it means reducing the control of the central government. So, why do you think you get a different result?
I can’t promise you that we will. We’re trying to convey the challenges the current growth model will run into. China is just so much bigger now. It’s a trivial statement but it’s an important one. If you do the math, a 4 percent of GDP current-account surplus today would be the same as a 10 percent surplus back when growth was 10 percent. [In 2007, China’s current-account surplus — the broadest measure of a country’s trade position — reached about 10 percent.] That’s not sustainable.
…in terms of the issues we started talking about, I’m probably now more worried about subsidies, non-market practices, industrial tools, and the broad macro picture of a really high savings rate and the lack of household consumption.
Their manufacturing trade surplus right now is higher, as a share of global GDP, than Germany’s plus Japan’s ever was. They’re pushing on the boundaries of what the rest of the world is going to be able to accommodate. When you’re 30 percent of world manufacturing and you’re growing at a really fast rate, you’re displacing others.
Of course, with cheap solar panels and batteries and so on, nobody’s holding a gun to the head of consumers and saying you must buy Chinese. The way you stop that presumably is through tariffs and other restrictions on trade. How close is the U.S. to imposing tariffs or other restrictions?

Questions like that are part of the 301 tariffs review or link to it in some way. Because it’s an ongoing review of the tariff I can’t really say a lot about it.
[In May 2022, USTR began a review of the tariffs on Chinese goods imposed by the Trump administration. The review is required by law four years after tariffs are enacted, but the report has no mandatory deadline. Former Deputy U.S. Trade Representative Sarah Bianchi said in an earlier Wire China interview that she didn’t expect the review to conclude any time soon.]
How concerned should the Chinese be about trade restrictions?
This is something that we tried to convey to them. It’s not just us, right? Europe launched their investigation into subsidies in the EV market. Whether it’s Mexico or India or Vietnam or Brazil having anti-dumping investigations or duties on one or another Chinese goods — this is something that’s going to happen if their overcapacity is washing over the rest of the world.

In the clean energy space, you also worry about an over-concentration of supply chains in one single country. The secretary has talked a lot about the need for diversified supply chains in critical industries. In the clean energy space, we think there should be production in many countries, not just the U.S.. We’re not trying to take the whole market ourselves. We think there should be production in multiple countries because it’s such an important industry.
With He Lifeng, did he raise the steel overcapacity issue and his efforts in the past?
I don’t quite remember if he did. I know we did as in, ‘You, China — we didn’t try to single him out — have tried to address overcapacity in the past. We don’t think it’s great for your economy either to over-concentrate resources inefficiently. You would be better off if you’re not concentrating a lot of resources in firms that are losing money.’ He talked about it more in general terms.

What about Premier Li Qiang? Did he know these issues?
Actually, yes. The secretary, as a kind of world-renowned macroeconomic policy maker, was pushing issues around saving and household consumption. It’s not like these were new issues to him. He was very well-versed in talking with her. He really heard her concerns and was talking back-and-forth with her.
MISCELLANEA | |
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RECENTLY READ | I recently re-read the Three Body Problem trilogy. I also recently read Tomorrow and Tomorrow and Tomorrow and really enjoyed it. |
FAVORITE FILM | Eternal Sunshine of the Spotless Mind |
FAVORITE MUSIC | I love all sorts of music. I listen to a lot of Indie Rock. Bands like The National, The Hold Steady, Boy Genius. |
We were talking about the role of the central government in overcapacity. One thing the central government does is set the rate on the RMB. The yuan has devalued over the last few years. How much of that, do you think, is an effort to goose exports?
If you look at what they’re doing, interestingly, they have been trying to slow the depreciation. If you look at the People’s Bank of China, where it sets the fixing relative to where the spot [market] is, they don’t seem to want the currency to depreciate rapidly. I think they view that as destabilizing in the financial sector. [The Chinese central bank sets the yuan’s value through a daily ‘fix’, and allows the yuan, compared to the dollar, to trade in a 2 percent range on either side of the fix.]
It’s always dangerous to guess why an exchange rate is moving or why the pressures are what they are. It’s in part a difference in interest rates [with other countries]. China has got borderline deflation, so you would expect their interest rates to stay lower longer, and that may have some impact relative to the U.S. or Europe. You might see some pressure on the currency there.

Credit: People’s Bank of China
I don’t view the current pattern with the RMB to be a deliberate competitive attempt. We are certainly always on the lookout for that. Don’t get me wrong; that’s a key role here at Treasury. We talked to them about the RMB and about transparency in their intervention and transparency around what they’re doing. And we talked to them about our concerns if the RMB starts moving in a swift way.
But in terms of the issues we started talking about, I’m probably now more worried about subsidies, non-market practices, industrial tools, and the broad macro picture of a really high savings rate and the lack of household consumption.
But the RMB was part of the discussion?
I think it’s almost impossible for us to talk to the PBOC and not talk about the RMB.
Do you have a kind of time limit when you’re talking about these macro issues? Do you think that if there isn’t some improvement in six months, a year, or whatever, that there will probably be restrictions of one kind or another?
I don’t think we can put a specific timetable on anything. We’re about to have the kickoff meeting next week, so we’ll see how things start going. The things we’re trying to get at in this process, many of them are much longer-term issues.
In some sense, they’re separate from a question of what might happen [regarding possible trade restrictions], whether it’s the Section 301 review or anything else.
A CCTV short of U.S. Treasury Secretary Janet Yellen dining in Sichuan, April 7, 2024. Credit: CCTV
For a final question, the Chinese were closely watching Yellen — where she went out to eat, how she uses chopsticks. The idea of a Jewish woman from Brooklyn who doesn’t know how to use chopsticks? That would be more surprising. What was your takeaway from how they treated her?
The secretary likes to eat dinner with the team. She’s incredibly friendly and generous with her time. So, we go out to a restaurant, and we just sit in the regular part of the restaurant. I think that is both surprising and endearing to people in China. They often take out their cameras and take pictures when they see her come in. They’re all smiling and they’re happy to see her there.
It’s not a 100 percent deliberate strategy of soft diplomacy as much as she wants to eat in a normal restaurant with people. She’s happy to smile and talk to people and say hello. So, yes, not only from Brooklyn, but also having spent a large chunk of her life in San Francisco, the idea that she didn’t know how to use chopsticks would have been truly shocking. But yes, she is quite skilled with her chopsticks and happy to try all the local food and go out and enjoy being in a place.

Bob Davis, a former correspondent at The Wall Street Journal, covered U.S.-China relations beginning in the 1990s. He co-authored “Superpower Showdown,” with Lingling Wei, which chronicles the two nations’ economic and trade rivalry. He can be reached via bobdavisreports.com.