Chinese stocks retreated by midday on Wednesday led by a correction in expensive small-cap stocks, after China reported economic growth slowed to a six-year low.

But shares in Hong Kong held firm on signs Chinese mutual fund managers were raising billions of dollars in their quest for bargains in the city.

China's economy grew 7 per cent in the January-March quarter from a year earlier - the worst showing since the depths of the global financial crisis, data showed, highlighting the need for further monetary easing.

"Without further easing, many businesses in traditional industries will die," said Qi Yifeng, analyst at consultancy CEBM Group Ltd in Shanghai.

"But investors are getting less and less excited about easing because such expectation has been fully priced into the stock market."

The CSI300 index fell 0.9 per cent, to 4,400.50 points by midday, while the Shanghai Composite Index lost 1.1 per cent, to 4,089.52 points.

Shenzhen's start-up board ChiNext tumbled 3.6 per cent, set for its biggest daily loss in nearly four months.

The Hang Seng index, however, only dipped 0.1 per cent, to 27,547.75 points, while the Hong Kong China Enterprises Index gained 0.7 per cent, to 14,368.61.

"Bad economic data could trigger short-term correction in mainland stocks, but Hong Kong stocks will still benefit from fresh mainland and global money inflows," China Investment Securities said in a note to clients.

Invesco Ltd's China fund venture has raised about 11 billion yuan ($1.8 billion) for China's first mutual fund to invest under the Shanghai-Hong Kong Stock Connect scheme, two sources told Reuters.

The fundraising, the second biggest for an equity-focused mutual fund in China this year, underscores strong mainland interest in Hong Kong stocks, and could fuel the city's market rally.

BOC International has forecast that about 100 billion yuan could be raised by mutual fund managers in April to invest in Hong Kong's stock market.

"Most of China's small-cap companies are expensive, but in Hong Kong, some small caps are seriously undervalued, while some others are rationally priced," said Huang Ruiqing, fund manager at Bosera Asset Management Co, which will also launch a fund to invest in Hong Kong next week.

He added that valuations of mainland-listed blue chips, such as banks, were still reasonable.

Shenzhen's SME board, home to small- and medium-sized enterprises, tumbled more than 3 per cent, while the CSI300 Banking Index was up over 1 per cent.

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