Yellen, who arrived in Beijing on Thursday said the moves underscored the need for "resilient" and diverse supply chains, and warned that the United States and its allies will fight back against what she called China's "unfair economic practices."

Yellen made the remarks to the American Chamber of Commerce in China (AmCham) after what a Treasury official called "substantive" talks with former Chinese economy czar Liu He, a close confidante of President Xi Jinping, and outgoing top Chinese central banker Yi Gang. She is slated to meet later Friday with Premier Li Qiang.

Yellen's trip is part of a flurry of visits aimed at calming tensions between Washington and Beijing that escalated after the U.S. military shot down a Chinese government balloon over the United States and amid increasing strains over export controls.

No major breakthroughs are expected, with officials from both sides accepting that safeguarding national security interests now trumps deepening economic ties.

China hopes the U.S. will take "concrete actions" to create a favourable environment for the healthy development of bilateral economic and trade ties, China's finance ministry said in a statement on Friday.

"No winners emerge from a trade war or from decoupling and 'breaking chains'," the statement added.

U.S. firms in China hope Yellen's visit will ensure trade and commercial lanes between the two economies remain open, regardless of the temperature of geo-political tensions.

AmCham President Michael Hart welcomed Yellen's "extra firepower" in pressing for changes in China's policies.

"Yellen's visit is significant because it allows more conversations to happen, it allows more mid-level folks from both sides to come," he said.

"I think if there was another year of no visits by top U.S. government leaders, the market would get colder," he added.

TEEING UP POSSIBLE BIDEN-XI MEETING

The U.S. diplomatic push comes ahead of a possible meeting between President Joe Biden and Xi as soon as September's Group of 20 Summit in New Delhi or the Asia-Pacific Economic Cooperation gathering scheduled for November in San Francisco.

Secretary of State Antony Blinken traveled to Beijing last month and agreed with Xi that the mutual rivalry should not veer into conflict, and Biden's climate envoy John Kerry is expected to visit later this month.

Yellen said she came to work toward a "stable and constructive relationship" between the two countries, while making clear that Washington will act to protect its national security interests and human rights.

Regular exchanges could help both countries monitor economic and financial risks at a time when the global economy was facing "headwinds like Russia’s illegal war in Ukraine and the lingering effects of the pandemic," Yellen added.

Yellen said she would make clear to Chinese officials that Washington was not seeking "a wholesale separation of our economies," but raised concerns about their use of expanded subsidies for state-owned enterprises and domestic firms, barriers to market access for foreign firms, and recent "punitive actions" against U.S. firms.

Yellen said Washington was still evaluating new Chinese export controls on gallium and germanium, critical minerals used in technologies like semiconductors, but said the move underscored the need for "resilient and diversified supply chains."

MARKET REFORMS

Yellen also took aim at China's planned economy, urging Beijing to return to more market-oriented practices that had underpinned its rapid growth in past years.

"A shift toward market reforms would be in China’s interests," the former top U.S. central banker told the U.S. business executives.

"A market-based approach helped spur rapid growth in China and helped lift hundreds of millions of people out of poverty. This is a remarkable economic success story."

Yellen noted that China's enormous and growing middle-class provided a big market for American goods and services, and stressed that Washington's targeted actions against China were based on national security concerns.

"We seek to diversify, not to decouple," she said. "A decoupling of the world’s two largest economies would be destabilizing for the global economy, and it would be virtually impossible to undertake."