CHINA’S shares stumbled lower yesterday 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 Shanghai Composite Index eased 1.78 percent, while the CSI300 index of the largest listed companies in Shanghai and Shenzhen lost 1.53 percent.

    The official version of the purchasing managers’ index (PMI) survey for manufacturing slipped to 49.4 in January, from 49.7 the month before and short of forecasts of 49.6.

    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 China’s economy.

    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 Liu Ligang, ANZ’s chief China economist.

    The Australian bank expects China 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 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 market, with 12 trillion yuan (US$1.8 trillion) sliced off the value of its benchmark indices.

    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. (SD-Agencies)