Chinese equities tumbled by 6.5 per cent yesterday from record highs after the government announced a small increase in the share-trading tax in a move to cool speculation.

The main stock index has more than quadrupled in the past year and a half, but it's been a volatile few days for China's stock markets since former US Federal Reserve chairman Alan Greenspan rattled nerves when he said last week that Chinese shares were due a major correction.

The Shanghai Composite Index posted its second-biggest fall in a decade, surpassed only by a February 27th plunge of 8.8 per cent that triggered losses worldwide, even though Chinese equities account for only a tiny chunk of the world market.

Yesterday's decline struck off around €125 billion off the value of the Shanghai and Shenzhen markets, with turnover reaching record levels.

But the index showed resilience yesterday with investor sentiment buoyed by the World Bank raising its growth forecasts and Moody's Investors Service flagging an upgrade to its credit rating.

The Chinese ministry of finance announced earlier this week that it would raise the stamp tax to 0.3 per cent from 0.1 per cent, the latest in a series of official steps - including an interest rate rise this month - to cool the market.

The general view is that by targeting the speculators who have accounted for the bulk of turnover in recent weeks, the tax rise could hurt the market in the short term. But they did not expect the market to crash or reverse a long-term uptrend.

Fund managers and share traders said the upward trend was intact, and that the stamp duty was likely to hurt the speculators who had flooded the market in recent months.

"The main impact could be damage to the new-found confidence in the Chinese capital market. The impact on the real economy via reduced consumption and investment is likely to remain limited," the World Bank said in its quarterly report on the Chinese economy. The bank also raised its forecast for 2007 gross domestic product growth to 10.4 per cent.