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China stocks surge on PBOC stimulus hopes

Chinese stocks staged a late rally on Tuesday as speculation of more stimulus from the country's central bank helped to drive shares higher.

The Shanghai Composite finished the session up 3.1 percent, closing at a fresh three-year peak and clocking its best daily gain since September 2013.

Financial stocks were the best performers on the benchmark, with Founder Securities and China Merchants Bank each jumping 10 percent. Minsheng Banking was also 10 percent higher after it announced that Anbang Insurance had bought 5 percent of its shares.

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Meanwhile, Hong Kong shares rose 1.4 percent and the Shenzhen Composite finished 1.5 percent higher. China Securities Index 300 saw triple-digit gains and ended the session 3.7 percent higher - its biggest daily rise since July 2013.

"It's all about stimulus allowing investors the assurances to believe in compelling valuation," Chris Weston, a chief market strategist at brokerage IG Markets, told CNBC via email.

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It came amid rumors that the People's Bank of China (PBoC) may unveil another round of stimulus, according to Reuters, citing analysts, which could include a cut in the reserve requirements for banks. The news wire also mentioned rumors that institutional money had begun moving into bank and brokerage stocks.

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Earlier this week, official data showed that factory activity data hit an eight-month low. China is on course to post its slowest growth in nearly a quarter of a century and the country's central bank looks increasingly ready to act once again.

On November 21, the PBOC said it would cut one-year benchmark lending rates by 40 basis points to 5.6 percent and also lowered one-year benchmark deposit rates by 25 basis points. The surprise move shocked global markets into a rally, and the Shenzhen Composite has recorded gains of 30.6 percent so far this year.

Speculation of further action was also fueled on Tuesday after the PBOC failed to drain liquidity using its repurchase operation, according to Weston. This mechanism is used to reduce funds from the banking system via bond repurchase agreements and its absence indicates there is going to be broad-based easing of reserve ratio requirements, Weston added.