CNBC Fast Money. Why Did Yellen Go To Beijing?

Summary: I spoke with CNBC Fast Money anchor Melissa Lee today about what Treasury Secretary Janet Yellen and her Chinese counterparts are hoping to get out of her Beijing trip. You can see the short interview by clicking here. And I have pasted (at the bottom of the page) the notes that I used to brief the producers by phone before the show so you can see what happens behind the curtain.

Why Did Secretary Yellen Go To Beijing 

Let’s start with the two things everybody knows. First, US/China relations are at their lowest point since Richard Nixon met Mao Zedong in Hangzhou in 1972. Second, there is no information that Secretary Yellen could possible have carried to China that can’t be accomplished on a Zoom call. So, why did she go?

The US and China have not been getting along for some time. Lately, the situation has gotten much worse. After restricting exports of advanced semiconductor capital goods last year, the CHIPS Act forced companies taking funds to commit to no hi-tech investments in China for 10 years. (Smack!) The Chinese then banned Chinese SOEs from using Micron memory chips. (Smack!).

Last Friday, the Netherlands announced (after US urging) that they will restrict exports of advanced microchip equipment (ASML) and materials (ASM), without which Chinese semiconductor makers (SMIC) can’t manufacture the most advanced chips.

On Saturday, the new Chinese security law went into effect that specifies the Chinese government can arrest and deny exit to any foreigner who behaves contrary to Chinese interests (without spelling pout just what that means), and Xi Jinping hosted a meeting of the Shanghai Cooperation Organization (SCO) to welcome Iran as their newest member.

Then came word word that President Biden is considering setting up a CIFIUS-like process that would require American investors to apply for permission (licenses) to export capital to China. (CIFIUS is the procedure already in place to review intended Chinese investments and acquisitions in the US.)

On Monday, China imposed controls on the export of two key minerals (gallium and germanium). And all this took place before Yellen’s plane got off the ground.

Political Optics

As I said on the show, optics are everything in state visits of this sort. Each side attempts to set up situations that will produce flattering photo ops.

When Secretary Blinken visited Beijing a few weeks ago, we all saw the photo of Xi Jinping sitting at the head of a long table (the schoolmaster) with Blinken sitting along the side of the table taking notes (the student). That photo got a lot of play on CCTV.

For Janet Yellen’s visit, the Chinese had home field advantage—again. They used it to set up the photos above of Yellen meeting with Chinese Premier Li Qiang (left) while Xi Jinping was out of town on important business, with formerretired Vice Premier Liu He (center), who also scored a photo with then-President Trump during the 2018 trade negotiations. (Liu He was China’s fourth-ranking Vice Premier at the time—a major score for Chinese TV). On this trip, Sec. Yellen also met with outgoing PBOC Governor Yi Gang, former central bank governor Zhou Xiaochuan, with Pan Gongsheng (new PBOC Party Chief and almost certain to replace Yi Gang, Finance Minister Liu Kun, and (second-ranking) Vice Premier He Lifeng, who replaced Liu He a few months ago.

The parade of US officials making trips to Beijing makes me wonder whether there is anyone in the administration with enough on the ground China experience to understand how valuable these trips are to the great leader narrative that Xi Jinping is promoting inside China. Remember, all media in China is tightly controlled by the government. In a small number of weeks, Chinese people have been treated to videos of Xi Jinping lecturing Anthony Blinken (who was taking notes), of Xi Jinping refusing to meet with Janet Yellen so he could lecture the Communist Youth League, and of Xi Jinping meeting with his BFF Henry Kissinger on the same day he was too busy to meet with John Kerry. Seems to me if you’re going to deliver this string of gifts to Xi Jinping you should get something of value in return.

This is the political ‘Money Shot’ for Yellen

Secretary Yellen got her photo app for our domestic consumption too. In the photo, above, she is talking tough about the things the Chinese government is doing to American businesses to a roomful of American business people at the AmCham China offices. (You can bet this meeting was not covered by CCTV.) Being an expat in China is not what it used to be, especially since the new security law—I think of it as the Foreign Direct Investment Prevention Act—went into effect. This should be of some value back at home to show we are being tough on China.

That said, I have empathy for Janet Yellen’s frustration at the deterioration of US/China relations and her effort to get some kind of conversation going with her Chinese counterparts. Things can happen quickly in global financial markets. When they do, it’s good for Treasury officials and central bankers for the two biggest economies to know how to find each other.

My notes I used to brief the Producers what’s on my mind before the show

Dr. John

The views and opinions expressed in this article are those of Dr. John Rutledge. Assumptions made in the analysis are not reflective of the position of any entity other than Dr. Rutledge’s. The information contained in this document does not constitute a solicitation, offer or recommendation to purchase or sell any particular security or investment product, or to engage in any particular strategy or in any transaction. You should not rely on any information contained herein in making a decision with respect to an investment. You should not construe the contents of this document as legal, business or tax advice and should consult with your own attorney, business advisor and tax advisor as to the legal, business, tax and related matters related hereto.