Professor emphasizes the significance of Yellen’s trip to China for U.S.-China relations

U.S. Treasury Secretary Janet Yellen’s visit to China is pivotal for maintaining ongoing communication between the two countries, according to Eswar Prasad, an economics professor at Cornell University. 

“What is crucial about Janet Yellen’s visit is that it facilitates discussions at both technical and high-level policy levels,” stated Prasad in an interview with CNBC’s “Squawk Box Asia” on Friday. 

In recent years, tensions between the U.S. and China have escalated due to the trade war that began in 2018 during the Trump administration. Geopolitical tensions persist today, with accusations regarding China’s alleged spy activity in U.S. airspace and the ongoing battle for technological superiority.

Yellen arrived in Beijing on Thursday for a four-day trip.

Her itinerary includes a meeting with Premier Li Qiang on Friday afternoon, following earlier meetings with former Vice Premier Liu He and former central bank governor Yi Gang, as stated by the Treasury Department.

This visit follows Secretary of State Antony Blinken’s recent trip to Beijing, marking the first high-level meeting between the two countries after months of strained relations.

“The key is to focus on damage control,” remarked Prasad during his CNBC interview. He added that Chinese officials can handle anti-China rhetoric as long as it does not lead to hostile actions that could impede China’s economic development.

“Chinese officials closely follow the U.S. election cycle and they recognize the potential for increased anti-China rhetoric in Washington with November 2024 on the horizon,” he said.

“The hope is that they can prevent any further actions perceived as hostile towards China.”

The Biden administration has adopted a less confrontational stance towards China this year, according to Andy Rothman, an investment strategist at Matthews Asia. He believes there is potential for improved cooperation, engagement, and trust moving forward.

“U.S.-China relations are unlikely to improve, but the risk of a crisis that spirals out of control has decreased significantly in the past few months,” Rothman commented during a CNBC interview on Friday.

The world’s second-largest economy has experienced disappointing economic data in the second quarter, raising concerns that the post-Covid recovery may be weaker than anticipated.

While Beijing maintains that China’s growth remains on track to reach its target of around 5%, Wall Street banks have been downgrading their GDP forecasts for China due to anticipated economic turbulence.

Prasad described China’s economy as being at a “perilous juncture.” He highlighted the weakening of key sources of domestic growth, such as the real estate market, infrastructure investment, and government spending, stating that these factors are likely to remain weak.

“Reducing tensions in the U.S.-China relationship would certainly benefit domestic economic activity and help maintain confidence,” added the economist.

Prasad believes that the two countries need to address geopolitical and economic issues separately in order to make progress in their relationship. On the other hand, Rothman does not expect geopolitical tensions to have a significant impact on China’s economy, as domestic demand and a consumer-led recovery are already underway.

Nevertheless, he agrees that American investors will continue to be cautious when it comes to China, and any improvements in the relationship between the two countries are unlikely to be seen before the end of 2024.