Bond yields rise as investors brace for tensions to escalate amid Joe Biden’s presidential election battle against Donald Trump

Yellen’s message

Yellen’s words were a clear message to Beijing of the dangers of inflaming trade tensions, given that 2024 is a US election year and anti-Chinese sentiment on both sides of American politics is running high.

Even as Yellen was meeting with senior Chinese officials, the Biden administration unveiled a fresh $US6.6 billion ($10 billion) in grants to Taiwan Semiconductor Manufacturing Company, the leading maker of the most advanced microchips, as part of a drive to attract the world’s most sophisticated semiconductor technology to the US.

The Biden administration is spending trillions of dollars to bolster US manufacturing of items such as semiconductors, lithium-ion batteries, solar panels and electric vehicles (EV) to reduce the country’s dependence on China.

The problem is the financial viability of these very industries is being threatened by a flood of Chinese exports, which could result in job losses and business closures.

Little wonder, then, that Yellen has indicated the US is prepared to do more to protect its high-tech green industries, noting it “would not be acceptable to the United States” for China to continue to follow an export strategy that harms American workers.

Washington worries that while Beijing previously boosted economic growth by funnelling money into property and infrastructure, it is now relying on massive investment and subsidies – such as low-interest loans from state banks and cheap land – in high-tech manufacturing.

This has created widespread Chinese overcapacity in products such as solar panels, semiconductors, EVs and machinery, and Chinese firms then seek to offload the excess into global markets.

Yellen’s four-day visit to China confirms that Beijing has no intention of altering its economic strategy.

Of course, US and European officials have complained about Chinese overproduction before, most recently about the dumping of steel and aluminium in 2016.

But their complaints have become more bitter now that China has moved up the value chain, and is pushing into more capital-intensive and technology-intensive areas such as electric machinery and EVs.

This has turned China into a serious competitive threat to high-end manufacturers in the US and Europe, rather than simply a supplier of cheap parts.

US and European companies are concerned. US export prices are about 20 per cent higher than they were in 2019, while European prices are up 15 per cent. In contrast, China’s export prices are flat.

And at the same time as China’s cost gap with US and European manufacturers is widening, it has managed to reduce the quality gap with US and European manufactured goods.

Biden will intensify pressure

But despite her warnings of the political fallout, Yellen’s four-day visit to China confirms that Beijing has no intention of altering its economic strategy.

Chinese officials repeatedly denied the country was illegally subsidising its new energy exports, and instead complained at what Beijing perceives as an attempt to suppress China’s rise.

And this means that ahead of the November US presidential election, the Biden administration will ramp up the pressure on Beijing, especially since Republican contender Donald Trump is proposing sweeping new tariffs.

Washington has already slapped restrictions on Beijing’s access to semiconductor technology, which is aimed at restraining China’s progress in developing its domestic chip capabilities, Chinese EVs are already subject to a 25 per cent tariff.

But the Biden administration is now discussing hiking the tariff on EVs, as well as raising tariffs on other Chinese-made products, such as solar panels and EV battery packs.

As Yellen wraps up her China trip, it’s inevitable that US bond yields are rising as investors brace for the next salvo in the US-China trade war.