Chinese shares got off to a halting start on Monday after an official measure of activity in the giant factory sector fell to its lowest since mid-2012, offering no respite from the economic drift that has dogged markets for months.
The official version of the PMI survey for manufacturing slipped to 49.4 in January, from 49.7 the month before and short of forecasts of 49.6. ECONCN
While the miss was minor, the PMI for services also disappointed by easing to 53.5 and challenged hopes consumption would take over from industry as the driving force for the world's second-largest economy.
A private survey - the Caixin/Markit China Manufacturing PMI - underscored the trend by showing the factory sector shrank in December for the 11th consecutive month.
The Shanghai Composite Index .SSEC eased 0.5 percent in early trade, while the CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen fell 0.4 percent.
Equity and bond markets globally had rallied on Friday after the Bank of Japan surprised by cutting interest rates into negative territory for the first time.
That did not stop January from being the worst month since October 2008 for China's stock markets, with 12 trillion yuan ($1.8 trillion) sliced off the value of its benchmark indexes.
The downtrend risks becoming a vicious cycle, as those who have used shares as collateral for loans or have bought stocks with borrowed money are forced to meet margin calls or sell up.
The dangers are multiplied by the vast scale of the shadow banking system.
Mid-tier Chinese banks are increasingly using complex instruments to make new loans or restructure existing ones that are then shown as low-risk investments on their balance sheets, masking the scale and risks of their lending.
The size of this 'shadow loan' book rose by a third in the first half of 2015 to an estimated $1.8 trillion, equivalent to 16.5 percent of all commercial loans, a UBS analysis shows.
HEDGE FUNDS TARGET YUAN
The People's Bank of China (PBOC) has managed to calm fears of an imminent devaluation of its yuan by holding its midpointCNY=SAEC, a reference point for trading, rock steady day after day.
The Monday fix of 6.5539 per dollar was just a whisker softer than Friday even though the dollar had climbed broadly elsewhere in the wake of the Bank of Japan's easing.
Still, many analysts suspect the currency will be allowed to move lower over time, and some funds are actively betting on it.
The Wall Street Journal reported some of the biggest names in the hedge-fund industry were wagering the yuan would fall further, setting up a showdown between Wall Street and the leaders of the world's second-largest economy.
Chinese state run media has carried repeated warnings to offshore speculators against trying to profit from a yuan devaluation.
Such reports will only heighten the focus on the PBoC's reserves position, due to be reported some time this week, for details on just how much intervention has been needed to shelter the yuan from capital flight.
(Writing by Wayne Cole; Editing by Neil Fullick)
Reference: Reuters
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