Chinese Stocks Surge as Economy Continues to Weaken

Chinese stocks are no longer in a bear market, having risen 20% from their lowest point in August. At the same time, more indicators suggest that China’s economic growth is still worsening, with the threat of growing poverty likelier in the hardest-hit regions of the country and possibly throughout the continent.

The Shanghai Composite Index rose 1.8% as rumors of growing government support for the falling stock market lifts prices, helping most mainland indices rise in end-of-week trading.

Chinese stocks are no longer in a bear market, having risen 20% from their lowest point in August. At the same time, more indicators suggest that China’s economic growth is still worsening, with the threat of growing poverty likelier in the hardest-hit regions of the country and possibly throughout the continent.

The Shanghai Composite Index rose 1.8% as rumors of growing government support for the falling stock market lifts prices, helping most mainland indices rise in end-of-week trading.

However, growing political pressures to stem the weakening growth have led China’s President Xi Jinxing to hint that weaker growth is likely to come in the near term. This week, President Xi said the country will need to sustain at least 6.5% GDP growth to become “moderately prosperous”, adding that the Communist Party remains on track to double the size of the country’s economy by 2020 compared to its size in 2010.

Earlier this year, official figures have pegged Chinese growth at 7% on an annualized rate, although those figures have been hotly contested by a growing number of economists, investment banks, and analysts both in and out of the country. Some economists have predicted growth is closer to 3%, hinting at the possibility of a protracted economic decline that could result in China’s growth rate falling behind America’s in 2016.

Despite those criticisms, Xi reiterated that the country is on track to “comprehensively build a moderately prosperous society,” adding that the government continues to reform its financial sector to stimulate activity and growth. Some analysts have argued that increasingly easy credit in China has resulted in rising default risks, and that a commensurate rise in productivity is necessary to avoid a default.

Nonetheless, Xi said the Communist Party would become more flexible in its approach to the renminbi, and will allow companies to approach currency with a “negative list.” This means that companies will be allowed to use and exchange currency except for a list of prohibitions, instead of following strict guidelines of allowed behavior, as is currently the case.

The Communist Party also said it would support the renminbi and promote its adoption as a global currency, indicating it remains committed to transforming the yuan into a reserve currency. The party also said it would work with the International Monetary Fund to allow that body to determine the value of its yuan holdings, as the IMF also does with the dollar, euro, yen, and British pound.

At the same time, China has sharply devalued the renminbi to support exporters as manufacturing activity has fallen throughout 2015. The yuan fell 2% in value in August, and further devaluations are possible as manufacturing remains sluggish.

China has also focused on stimulating domestic demand with looser lending regulations, lower bank reserves, and lower interest rates. This is expected to cause personal debt rates in the country to rise sharply despite murky bankruptcy protections for consumers set by the Communist Party.