And Brussels this week launched two investigations into Chinese solar panel manufacturers that it claims have received market-distorting subsidies.
Still, Beijing’s support for high-end manufacturing appears to be paying some dividends, as the country grapples with a deepening property market collapse and soaring youth unemployment.
Manufacturing rebounds
In March, China’s official factory purchasing managers index climbed above the 50-point level separating expansion from contraction for the first time since September, while the export orders sub-index climbed to a 13-month-high.
What’s more, China’s manufacturing investment is rebounding. Overall factory investment jumped nearly 10 per cent in the first two months of this year compared with the same period last year, while investment in computer and communication-equipment was up nearly 15 per cent.
Chinese banks are clearly keen to provide financing for high-end manufacturing.
Pan Gongsheng, the head of China’s central bank, said in January that growth rates for green loans, short-term manufacturing loans and long-term manufacturing loans significantly outstripped overall lending growth last year.
At the same time, bank lending to the real estate sector and to local government financing vehicles has shrivelled.
Still, Beijing’s strategy of relying on increasing exports of high-end manufactured products to bolster flagging economic growth could be stymied by the weak Japanese currency, which is now trading at lows not seen since 1990.
The Japanese yen is trading close to the lowest level since 1990. Bloomberg
The yen has ranked among the world’s weakest major currencies this year. And it has continued to slide even after the Bank of Japan last month moved to end its negative interest rate policy after eight years.
In its first-rate increase since 2007, the Bank of Japan raised its key target for short-term rates to between 0 per cent and 0.1 per cent and removed a target for the yield on 10-year Japanese bonds.
Despite this rate rise, the Japanese currency is presently trading at 151.3 yen to the dollar, after briefly falling to a 34-year low of 151.97 yen to the dollar late last month.
Although Japanese authorities have signalled their resolve to intervene in foreign currency markets to counter weakness in the yen, analysts point out that they’ve so far refrained from taking any action. And this is emboldening traders to push the Japanese currency lower.
Analysts believe that if the yen breaches the 152 level, it could fall as low as 160, especially if the US Federal Reserve delays interest rate cuts.
But the weakness in the Japanese currency is likely causing consternation in Beijing, because Japan is also heavily reliant on the export of high-end manufactured goods.
A weaker yen helps to boost the competitiveness of Japanese-made products in global markets.
The drop in the yen comes as the Chinese yuan is also under pressure as traders expect the Chinese central bank to engage in further monetary easing to bolster economic activity in the world’s second-largest economy.
So far, Beijing has leant heavily against a rapid depreciation of the currency because although a weaker yuan helps Chinese exporters, China is anxious to avoid massive capital outflows following an unexpected yuan decline, as happened in 2015.
Still, there are signs that Beijing is losing patience with the weak Japanese yen.
Late last month, the Chinese central bank, the People’s Bank of China, suddenly weakened the yuan’s daily reference rate – which pins the currency to a level around which it is allowed to deviate just 2 per cent – by the most since early February.
This triggered a yuan sell-off, which sent the Chinese currency falling below the psychologically important 7.2 yuan to the US dollar level.
Some analysts argue that it’s only a matter of time before China joins Japan in competitive currency devaluations, perhaps dragging in other Asian nation such as Korea.
