In state-owned press reports yesterday, officials denied rumours the government planned to introduce a capital gains tax on stock transactions.

The China Securities Regulatory Commission also said it had no plans to set up a unit to investigate trading irregularities.

'There are already two departments in the CSRC responsible for investigating violations and along with the local-level investigative authorities these are sufficient to deal with any problems that arise,' spokesman Liu Fuhua said.

These rumours, along with massive mutual fund redemptions and expectations of an imminent interest rate rise, fuelled Tuesday's panic selling that helped push more than 900 of the 1,350 or so A-share companies down by their daily 10 per cent limit. 'This is a normal correction after China's stock market rose too fast in the past months,' CSRC director Zhu Jian said in a Bloomberg interview.

Adding to the problem was the flotation of large amounts of previously non-tradable state shares.

In the past few days, more than a dozen A-share companies announced that their shares were unloaded by majority shareholders, who are largely provincial governments. Among them were Sany Heavy Machinery, Citic Securities, ZTE Corp and Lu Zhou Lao Jao, which completed the share reform in mid-2005.

To win support for the share reform, state authorities had promised not to sell state shares for at least 18 months. About 26 billion yuan worth of state shares were available for sale in the market last month as the lock-up period expired. A further 40 billion yuan will be free to be sold this month.

For probably the first time since the mainland's stock markets were established in 1990, the precipitous drop roiled global markets and helped push the Dow Jones Industrial Average in New York down as much as 4.3 per cent at one point.

'It is truly bizarre to see the Shanghai market affecting the world like this,' Standard Chartered economist Stephen Green said. 'Basically, it was the straw that broke the camel's back, coming as it did after bearish comments from [former Federal Reserve chief] Alan Greenspan, a string of bad news out of the US and worries over Iran. Ironically, nothing really changed in China and sentiment is still strong and fundamentally bullish.'

Markets across the region continued to decline yesterday, with the Hang Seng Index falling 2.46 per cent, the Nikkei-225 Index dropping 2.85 per cent, the Korea Composite Index dipping 2.56 per cent and Mumbai's Sensex Index slipping 4.01 per cent.

Meanwhile, the last of the 116 companies listed on the Shenzhen small and medium enterprises board finished reporting their earnings for last year yesterday, posting an average 25.16 per cent rise in profits on the back of a 30.13 per cent jump in revenue.

Another boost for the market was provided by the news that small and medium-sized insurers will be allowed to start investing in stocks by appointing trustees.