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China stocks end week up 6.5% as hopes for Beijing stimulus build

First back-to-back weekly wins since August selloff

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The People's Bank Of China in Beijing

China shares logged two consecutive weeks of gains for the first time since August, as investors ramp up borrowing to buy stocks and expectations build for more government stimulus.

The Shanghai Composite SHCOMP, -0.14% finished up 6.5% this week, gaining 14.7% from the nadir of its recent selloff on Aug. 26. Hong Kong’s Hang Seng Index HSI, +0.04% is on track for its third straight week of gains, up 2.5% this week and 13% since its late September low through Thursday.

On Friday, the Shanghai Composite Index closed up 1.6%, and the Hang Seng Index gained 0.6%.

Hopes for stimulus in Japan are lifting shares there, too, with the NikkeiNIK, -0.88% closing up 1.1%, to 18,291.80, near its highest levels in a month. Australia’s S&P/ASX 200 XJO, +0.03% finished up 0.7%.

Local Chinese investors have regained some of their appetite for stocks after a bruising summer selloff knocked trillions in value from Chinese equities. Outstanding margin loans on the mainland, mostly from brokerages, edged up 5% this week through Thursday, on track for the biggest weekly increase since April, according to database Wind Information Co. Margin debt increased 7% so far in October through Thursday.

Expectations for government stimulus have lured Chinese investors back to the market, leading to a higher tolerance for risk and uptick in margin lending, according to Xiao Shijun, an analyst at Guodu Securities.

Borrowing to buy stocks helped fuel a yearlong rally that roughly doubled Shanghai’s value through June. But the practice also exacerbated losses as investors rushed to cover their positions during the selling. At 96.1 billion yuan ($15.1 billion), loans still remain down 57% from a record 2.27 trillion yuan in June.

Shares of tech firms like Hithink Royal Flush Information Network Co. and Nanfeng Ventilator Co. have bounced more than 50% in the past month on Shenzhen’s trading board for start-ups. The ChiNext Price Index, a benchmark for these stocks, has surged more than 35% from its bottom on Sept. 15. ChiNext shares were among the most overheated during the rally, tripling in value from the beginning of the year to June.

China’s banks also have ramped up lending, with bank credit at its highest on record for the month of September.

Another factor lifting stocks is renewed optimism for government help, after the latest indications of China’s deteriorating economy fueled concerns that China may not be able to meet its growth target of about 7% for this year.

Investors are now turning their focus to China’s third quarter growth figures, due for release Monday.

Beijing is known to increase spending during the fourth quarter to boost growth by year-end, and to announce measures ahead of its annual meeting where it discusses five-year economic plans. This year, the Communist Party is scheduled to meet the last week of October.

Japan’s dreary economic data also has stoked expectations that its central bank will introduce new easing measures at its next policy meeting on Oct. 30. The Bank of Japan said it would keep its annual asset purchases unchanged earlier this month, despite a persistent battle to stoke inflation and latest economic data hinting at another recession.

Foreign investors became net buyers of Japanese stocks, buying a net ¥521 billion ($4.38 billion) of Japanese stocks last week, after eight consecutive weeks of net selling, according to data from Japan’s Ministry of Finance.

Meanwhile, emerging-market currencies continue to get a lift from a weakening dollar, after falling U.S. consumer prices added to the batch of disappointing economic data reducing the odds of an interest-rate increase this year. That also helped lift U.S. stocks overnight.

The dollar DXY, +0.04% is currently flat at ¥118.93, after trading as low as ¥118.08 on Thursday, the dollar’s weakest level against the yen since late August.

Indonesia’s rupiah USDIDR, +0.41% is trading near a four-month high, last at 13,535 per U.S. dollar.

China’s onshore yuan weakened as much 0.2% this week against the U.S. dollar, which traded as its highest since late September, hitting 6.3599 yuan on Friday. It was last at 6.3566 yuan.

Despite Friday’s gains, worries about China’s economy led to tepid weekly performance for the region’s indexes.

The MSCI Asia Pacific Index is down 1.2% this week in local currency terms through Thursday, snapping two consecutive weeks of gains.

Chinese investors have flocked to China’s bond market, as demand for haven assets rise following the summer stock market crash.

Yields on Chinese five-year government bonds fell to as low as 2.907% on Friday from 3.5% in April. On Wednesday, the government sold 10-year government bonds at the lowest yield since 2008.

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