China's manufacturing sector contracted in January, a preliminary survey of activity published today, has indicated.

China reported on Monday that gross domestic product growth had slowed to 7.7% on year in the fourth quarter, from 7.8% in the third. Concerns about the impact of rebalancing the economy from an overreliance on investment has made Chinese shares one of the worst performers in the region, with the Shanghai Composite down 3.3% so far this year.

HSBC's purchasing managers' index (PMI) fell to 49.6 from 50.5 in December - - a reading below 50 shows contraction. It is the first time in six months the reading has dipped below that level.

“Growth in China isn’t going to pick up as the government is focused on rebalancing the economy and reducing reliance on credit,” Manpreet Gill, a Singapore-based senior investment strategist at Standard Chartered Bank, told Bloomberg. “While Chinese equities look inexpensive, they lack catalysts. Ongoing reforms in China will be a key challenge for markets this year.”

Hongbin Qu, chief economist, China & co- head of Asian Economic Research at HSBC (the former Hong Kong and Shanghai Bank) said today:  "The marginal contraction of January’s headline HSBC Flash China Manufacturing PMI was mainly dragged by cooling domestic demand conditions. This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth. As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in 1H 2013."

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