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Last Updated: Tuesday, 27 February 2007, 10:55 GMT
Share sale knocks Chinese market
Chinese man stands next to electronic board showing share prices
Analysts say stock market fundamentals are still strong
The Chinese stock market has suffered its worst day of trading in 10 years after a large wave of share selling by leading investors.

The benchmark Shanghai Composite Index fell nearly 9%, its worst daily performance since February 1997.

The fall comes amid rumours of a crackdown on illegal share offerings and trading, as well as fears about accelerating inflation.

The drop triggered falls in other markets across Asia and Europe.

In Hong Kong the Hang Seng index closed down 1.8%, while in Japan the Nikkei 225 index slid 0.5%.

Markets in London, Frankfurt and Paris also opened sharply down with leading mining stocks - whose performance is influenced by the state of the Chinese economy - under pressure.

Substance or speculation?

Chinese markets have been performing strongly on the back of the country's stellar economic growth, and the Shanghai Composite Index closed above the 3,000 mark for the first time on Monday.

Indeed, some commentators have said that the day's slump was itself the product of speculative pressures, and that economic fundamentals remained strong.

This kind of terrifying fall means the market has become abnormal
Chen Huiqin, Huatai Securities

Even so, shares tumbled 268.81 points to 2,771.791 on Tuesday after leading institutional investors chose to take profits amid suggestions the market may have peaked.

Few companies were immune to the wave of selling, with banking and metals stocks particularly weak.

Industrial & Commercial Bank of China, China's largest bank, slumped 8% while steel producer Baoshan dropped by 10%.

The sell-off was also precipitated by market talk about imminent interest rate rises after recent data showed a sharp rise in consumer prices.

Political factors also weighed on the market movements with speculation about government plans for tax reform and rural expenditure.

Greater caution

Analysts were divided over whether the fall was the start of broader trend but most agreed that leading investors had become more cautious.

"This kind of terrifying fall means the market has become abnormal," said Chen Huiqin, from Huatai Securities.

Electronic board showing share prices in Hong Kong
Shares fell in Hong Kong and other markets

The BBC's Quentin Sommerville in Shanghai said investing in shares had become increasingly popular at all levels of Chinese society and the government was worried that it would be blamed should the market suffer a prolonged slump.

The market sell-off immediately rippled through other Asian markets, which have all enjoyed a strong start to the year.

"We are having a correction and it can certainly go further," said Howard Gorges, vice-chairman of the South China Brokerage in Hong Kong.


MARKET DATA - 11:36 UK

FTSE 100
5429.64up
23.70 0.44%
Dax
5733.05up
19.54 0.34%
Cac 40
3784.02up
14.48 0.38%
Dow Jones
10403.79up
78.53 0.76%
Nasdaq
2273.57up
35.31 1.58%
S&P 500
1115.71up
11.22 1.02%
BBC Global 30
5707.15up
20.65 0.36%
Data delayed by at least 15 minutes

SEE ALSO
China's trade surplus jumps 67%
12 Feb 07 |  Business
China economy records huge growth
25 Jan 07 |  Business

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