updated 1/11/2008 6:17:43 PM ET 2008-01-11T23:17:43

Chinese stocks plunged Monday following government efforts to cool a market boom, recording their biggest one-day fall since a February drop that triggered a global sell-off.

The benchmark Shanghai Composite Index tumbled 8.3 percent to 3,670.40, falling for the third time in four sessions since the government raised a tax on trading last week. The index had dropped 2.7 percent Friday. The Shenzhen Composite Index for China’s smaller second market fell 7.9 percent to 1,039.90.

It was Shanghai’s biggest decline since Feb. 27, when the main-market composite index slid 8.8 percent, triggering selloffs in Hong Kong, New York and London.

“There is the risk that this snowballs into a crash. Sentiment is so fevered that a bubble could burst,” said Claire Innes, an economist in London with the consulting firm Global Insight.

But most other Asian markets shrugged off Monday’s plunge. Five markets — Australia, Indonesia, Singapore, South Korea and the Philippines — rose to record highs. Tokyo’s Nikkei 225 index edged up 0.08 percent, while Hong Kong’s benchmark index rose 0.6 percent.

Ripple effect not too severe
The impact of the Chinese decline on markets abroad was expected to be limited because Beijing keeps its markets largely isolated from global financial flows. Most Chinese shares are off-limits to foreign investors and financial controls prevent most Chinese from investing abroad.

The Chinese currency, the yuan, fell slightly against the dollar on Monday after rising throughout May.

Beijing is trying to cool a boom that by last week had pushed up Chinese stocks more than 50 percent since the start of the year. The rally has attracted millions of first-time investors who are pouring their savings into the market.

Government financial newspapers tried to reassure investors with front-page editorials Monday that said the tax hike on stock trades — from 0.1 percent to 0.3 percent — would be good for the market by encouraging longer-term investment in better stocks.

But blue chips were hammered as shares in about 1,000 of the 1,400 companies on the main “A”-share market fell by the maximum daily limit of 10 percent. They included Tsingtao Brewery and China Petroleum & Chemical Corp., also known as Sinopec, two of China’s most prominent companies.

Beijing has given no sign how much it wants prices to fall, but economists say Chinese leaders might consider 20 to 25 percent the right level to restore order to the market.

Drops in Chinese prices last week caused brief declines in markets in Tokyo, Hong Kong and elsewhere.

Analysts have been warning of a possible Chinese correction for weeks, reducing the element of surprise for investors abroad.

Philippine shares appeared to be benefiting from the sell-off in China as some foreign investors shift funds to elsewhere in the region, said Lawrence de Leon, an analyst at Accord Capital Equities Inc. in Manila.

“A lot of money is going out of the China equities and are moving into other Asian markets, among them the Philippines,” he said.

Even with the declines since last week, the Shanghai index is still up more than 37 percent since the start of the year, after rising more than 130 percent in 2006. It has dropped 15 percent since last Tuesday’s all-time high of 4,334.92.

The surge has been driven by strong corporate profits and an influx of money from Chinese investors, who have opened millions of new trading accounts and are dipping into theirs savings and mortgaging homes to buy stocks.

Authorities have warned that the new money could be fueling a bubble and they say novices could be hurt by a sharp fall in prices.

Regulators are facing conflicting pressures as they try to develop China’s markets into a source of financing for economic reform while also trying to discourage speculation, said Global Insight’s Innes.

To create a more stable market, Beijing will have to encourage more pension funds and other institutional investors to get into the market and ease barriers to foreigners owning shares, she said.

Otherwise, she said, “you’re going to keep seeing these cycles because it’s fueled by all this cheap cash flooding around.”

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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