Chinese stocks surged Tuesday on hopes that the government will flood the country with more stimulus policies after China reported it’s economy last year grew at its weakest pace in a quarter of a century.

Investors in front of brokerage board in Shanghai
Investors in front of brokerage board in Shanghai

The Shanghai Stock Exchange Composite Index jumped 3.2% to 3,008 and the Shenzhen Stock Exchange Composite Index leapt 3.6% to 1,896. Hong Kong’s benchmark the Hang Seng Index gained 2.1% to 19,636.

It seems counterintuitive to push stocks higher on learning that China’s gross domestic product grew 6.9% for all of 2015. Especially since fourth-quarter growth slowed to 6.8%. The numbers stoked fears that that Beijing won’t be able to manage the economic slowdown, but also led to expectations that more monetary easing measures were imminent, possibly before Lunar New Year holidays in early February.

Another bit of progress amidst the weak report was data showing that the country’s economic restructuring to a more consumer-based economy made progress last year, as the service sector accounted for more than half of GDP for the first time, official data showed.

The service sector contributed 50.5% to GDP in 2015, up from 48.1% in 2014, according to the National Bureau of Statistics (NBS). Factories’ contribution to GDP was 40.5%.

The value added in the service sector increased 8.3% year on year to 34.2 trillion yuan ($5.3 trillion  dollars), while growth was 3.9% for the primary sector and 6% for the secondary.

December saw industrial output miss expectations, rising just 5.9%, and retail sales grow 11.1%, also weaker than expected, according to China’s statistics bureau. For all of 2015, electric power and steel output fell for the first time in decades and coal production dropped for a second year in row.

“While headline growth looks fine, the breakdown of the figures points to overall weakness in the economy,” Zhou Hao, senior emerging markets economist for Asia at Commerzbank Singapore told Reuters.  “All in all, we believe that China will experience a ‘bumpy landing’ in the coming year.”

The People’s Bank of China helped market sentiments by keeping the yuan largely steady, setting the currency’s daily midpoint fix at 6.5596 per dollar.

“This is a new risk for China. If the renminbi continues to weaken, the volatility and capital outflows get worse, then that is likely to pose a challenge to growth.” Tommy Xie, economist at OCBC Bank in Singapore, told Reuters he expected more stimulus to the economy from the PBOC, but the stability of the yuan, also known as the renminbi, was critical to maintaining growth.
The Chinese slowdown combined with falling commodity prices caused the International Monetary Fund to cut its global growth forecasts again on Tuesday. The IMF now expects the world’s second-largest economy to grow only 6.3% in 2016.

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