By David Lawder

BEIJING (Reuters) -U.S. Treasury Secretary Janet Yellen told Chinese Premier Li Qiang on Sunday that the ability to have difficult conversations has put the two economic superpowers on “a more stable footing” over the past year.

As they began a meeting in Beijing, Li responded that the two countries needed to respect each other and should be partners, not adversaries, adding that “constructive progress” had been made during Yellen’s trip.

Yellen said Washington and Beijing had a “duty” to responsibly manage the complex relationship, as she brought her case for reining in China’s excess factory capacity to the Chinese leadership.

“While we have more to do, I believe that, over the past year, we have put our bilateral relationship on more stable footing,” Yellen said. “This has not meant ignoring our differences or avoiding tough conversations. It has meant understanding that we can only make progress if we directly and openly communicate with one another.”

Yellen “raised issues of concern, including industrial overcapacity in China and the impact that could have on American workers and firms,” according to a U.S. Treasury readout.

Yellen has made the threat of China’s excess production of electric vehicles (EVs), solar panels and other clean energy products to producers in the U.S. and other countries a focus of her second visit to China in nine months.

She visited Beijing in July 2023 to try to normalise bilateral economic relations after a period of heightened tension caused by differences over issues ranging from Taiwan to COVID-19’s origins and trade disputes.

In a further sign of the ties stabilising, U.S. President Joe Biden and Chinese President Xi Jinping sought to manage tensions over the South China Sea in a nearly two-hour call on Tuesday, their first direct talks since a summit in November.

U.S. and Chinese military officials met their Chinese counterparts last week for a series of rare meetings in Hawaii focused on operational safely and professionalism.

Following her meeting with Li, Yellen met with Beijing mayor Yin Yong and attended an event with students and professors at the elite Peking University.

BALANCED GROWTH

On Saturday in the southern export hub of Guangzhou, Yellen and her main economic counterpart, Vice Premier He Lifeng, agreed to launch a dialogue focused on “balanced growth”. Yellen said she intends to use the forum to advocate for a level playing field with China to protect U.S. workers and businesses.

“As the world’s two largest economies, we have a duty to our own countries and to the world to responsibly manage our complex relationship and to cooperate and show leadership on addressing pressing global challenges,” Yellen told Li.

The Economist Intelligence Unit forecasts China’s battery manufacturing capacity will outpace demand by a factor of four by 2027, as its EV industry continues to grow.

Beijing’s support for battery-powered rides has helped homegrown champions such as BYD (SZ:) and Geely grab share in the world’s biggest car market, and turn China into the world’s largest auto exporter.

But rapid growth has also meant China has created excess manufacturing capacity that could be between 5 and 10 million EVs per year, according to consultancy Automobility.

Still, far from curbing investment in manufacturing, China has doubled down on Xi’s new mantra of unleashing “new productive forces” by investing in cutting-edge technology including EVs, commercial spaceflight and life sciences – areas where many U.S. firms hold advantages.

Throughout her visit, Chinese state media have pushed back against Yellen’s message on excess capacity.

State news agency Xinhua on Sunday quoted Premier Li saying the U.S. should “refrain from turning economic and trade issues into political or security issues” and view the issue of production capacity from a “market-oriented and global perspective”.

The development of China’s clean energy sector, where overcapacity concerns are felt most acutely, will support the global energy transition, Xinhua quoted Li as saying.