Her speech comes as relations remain strained between the world's two biggest economies over a variety of issues, from Taiwan to trade to spying.
Chinese Foreign Minister Qin Gang last month accused Washington of stoking tensions between both powers, warning of "conflict and confrontation."
But Yellen said that the United States remains firm in its conviction to defend its values and national security.
"Within that context, we seek a constructive and fair economic relationship with China," she said in a speech at Johns Hopkins University's School of Advanced International Studies in Washington.
She also raised the need for both countries to be able to "frankly discuss difficult issues" and work together when possible.
Stressing that "healthy economic competition" is only sustainable with fairness, she said: "We will continue to partner with our allies to respond to China's unfair economic practices."
Yellen noted that China has expanded support for its state-owned enterprises and domestic private firms, to "dominate foreign competitors."
- Driven by security, values -
On the possible economic impact of some US national security decisions, Yellen insisted that those moves were "motivated solely by our concerns about our security and values."
The US administration is considering a program to restrict certain US outbound investments involving specific sensitive technology with significant national security implications.
But Yellen added: "Our goal is not to use these tools to gain competitive economic advantage."
She also pushed back on the notion that Washington was seeking to stifle China's economic and technological modernization, and said America does not "seek to decouple" its economy from that of China.
"A US strategy that recognizes China's right to modernize and acknowledges that there are economic costs to (the) pursuit of worthy national security goals is a reality-based sustainable starting point," Adam Posen, president of the Peterson Institute for International Economics, said in a statement.
Chinese President Xi Jinping previously slammed the United States for leading what he said was an effort to contain and suppress China.
Beijing's technology ambitions have been hit with restrictions by the United States and its allies, and Chinese authorities have doubled down on the need to move away from imports for sectors seen as key to national security, such as semiconductors.
- 'Worrisome indication' -
On differences between Washington and Beijing over the conflict in Ukraine, Yellen said that China's "no-limits partnership" and support for Russia is a "worrisome indication that it is not serious about ending the war."
She emphasized that China and others must not provide Moscow with material support or help it to evade Western sanctions, but nevertheless stressed the need for the United States and China to cooperate on urgent global challenges.
The two countries have clashed in recent years over trade, human rights and other issues, and relations soured even more this year when the United States shot down a Chinese balloon it said was used for surveillance -- a claim Beijing strongly denied.
While both countries have agreed to boost communication on macroeconomic issues, along with cooperation on climate and debt distress, Yellen said "more needs to be done."
"We call on China to follow through on its promise to work with us on these issues -- not as a favor to us, but out of our joint duty and obligation to the world," she added.
Saying she plans to travel to China at the appropriate time, Yellen added that she hopes to engage in "substantive dialogue" with her new counterpart to help "lay the groundwork for responsibly managing our bilateral relationship."
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