Chinese shares were in the red after returning from a week-long holiday, as a private Chinese manufacturing survey missed forecasts and China's central bank surprised markets by raising its short-term lending rates.
China's Shanghai composite fell 0.59 percent or 18.5 points to close at 3,140.6, while the Shenzhen composite was down 0.39 percent or 7.5 points at 1,909.78. Meanwhile in Hong Kong, the Hang Seng index was down 0.42 percent by mid-afternoon.
The People's Bank of China surprised markets by hiking short-term interest rates, also known as reverse repurchase agreements (repos), by ten basis points to 2.35 percent.
"The central bank has abandoned the benchmark deposit rate and borrowing rate as the policy interest rate tool. This, however, does not mean the start of a tightening cycle," said Iris Pang, senior economist of greater China at Natixis, in a Friday note.
Pang said that liquidity is still ample, but it comes at a higher cost, adding that if this were a tightening cycle, there would be a contraction in the money supply. She explained that the higher rates could be a move to promote deleveraging among companies.
"Since 2008, Beijing has quadrupled its total debt, and we can't fully quantify shadow banking, corporate and local government debt. We expect this year to see an acceleration of deleveraging for the Chinese economy," Gavin Parry, managing director of Parry International Trading, told CNBC late January.
China Caixin manufacturing purchasing managers' index (PMI) for January slowed to 51.0 from December's 47-month record high of 51.9, and missed a Reuters poll forecast of 51.2. The manufacturing PMI provides an overall view of activity in China's manufacturing sector, and is a closely watched indicator of economic health.
The week-long holiday was not without controversy, with Chinese billionaire Xiao Jianhua abducted from Hong Kong's Four Seasons hotel last week by Chinese agents. Xiao had reportedly helped China's richest families and leaders move money around, the Financial Times reported.
Companies directly or indirectly controlled by the Xiao's conglomerate Tomorrow Group saw their shares plummet amid uncertainty over his fate on Friday, Reuters said.
Sugar products maker Baotou Huazi plunged 10 percent, the daily downward limit on the Shanghai Stock Exchange, while Chemicals manufacturer Baotou Tomorrow Technology dropped 5.04 percent and Cement supplier Xishui Strong Year Inner Mongolia tumbled 10 percent.