The Shanghai Composite Index eased 1.8 percent, while the CSI300
index of the largest listed companies in Shanghai and Shenzhen lost
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
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
A private survey - the Caixin/Markit China Manufacturing PMI -
underscored the trend by showing factory activity shrinking for the
11th straight month.
"The manufacturing sector will likely face a tough year ahead on the
back of overcapacity, weakening global demand, and government's
plans to tackle pollution," said ANZ's chief China economist,
The Australian bank expects Beijing will have to ease policy
further, including a cut in banks' reserve requirements sometime in
the next two months.
Equity and bond markets globally had rallied on Friday after the
Bank of Japan stunned many by cutting its 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 CSI300
and the Shanghai Composite indexes fell more than 20 percent each in
Caroline Yu Maurer, head of Greater China Equities for BNP Paribas
Investment Partners in Hong Kong, said Chinese stocks were still not
attractive for investors to buy despite a sharp fall.
"Last year, the China market was propped up by the government, but
now, it's hard to find natural buyers," she said. Any slight rebound
would be used by investors as a chance to sell and so reduce their
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, an opaque network of trust companies and non-bank lenders.
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.
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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.
Concerns are not just focused on stocks. The Shanghai Stock Exchange
has warned several securities firms to strengthen risk control in
their corporate bond and asset-backed securities (ABS) businesses,
two sources with direct knowledge of the matter said.
Bond issuance has skyrocketed in the past year as firms took
advantage of easier regulations and falling yields.
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 midpoint, 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.
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
(Writing by Wayne Cole and Neil Fullick; Editing by Sam Holmes)
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