BEIJING (AP) — China's move to raise a tax on share trades, aimed at slowing a boom that could lead to a possible market bubble, seems to have worked, at least for now.The main Shanghai Composite Index tumbled 6.5 percent to 4,071.27 yesterday after hitting a record high on Tuesday. The Shenzhen Composite Index for China's smaller second market fell even more, closing down 7.2 percent at 1,199.45.

The decline in Chinese shares hit other markets, too, although not as dramatically as on February 27, when investors around the world flinched from a nearly 9 percent slide in the Shanghai index.

The retreat in Chinese shares came after the Finance Ministry tripled the "stamp tax" on stock trades from 0.1 percent to 0.3 percent, effective yesterday. The ministry was trying to "cool (the) stock market," the official Xinhua News Agency said.

"This policy change reveals the government's concern about a possible stock market bubble," said Citigroup economist Minggao Shen, describing the tax hike as Beijing's first formal move to cool the boom. "The market didn't know what the government was thinking until now."

Despite the drop, Shanghai's benchmark index is still up 52 percent for the year, following a 130 percent jump in 2006.

The gains have been fuelled by strong corporate profits and a flood of fresh money from millions of new investors sinking their savings into the stock market amid a scarcity of other investment options. Chinese banks pay just 3 percent interest on deposits.

The number of Chinese stock trading accounts has risen to about 100 million, with tens of thousands being opened every day. The press has reported on first-time investors mortgaging their homes or dipping into retirement savings to play the market.

Government officials and financial analysts have expressed concern that some novices are making risky investments, creating a possible bubble in prices.

Yesterday's drop modestly affected regional stock markets, with Tokyo's benchmark index slipping 0.5 percent and Hong Kong's market closing down 0.9 percent. South Korean shares inched up to a new record.

In Europe, stocks ended modestly lower after initially being off about 1 percent following the retrenchment in China.

The effects of the pullback in China's markets are somewhat limited to domestic investors as the country limits foreign investment in certain areas. While it has eased restrictions, the government still controls how many foreigners can purchase the mainstream, yuan-denominated stocks. Known as "A shares," these stocks account for the largest slice of the markets. There are also foreign currency-denominated "B shares." The benchmark Shanghai Composite Index tracks both A and B shares.

Retail investors in China have recently been moving into the B share market, however, as valuations remained lower than in the A share market.

Chinese investor confidence has been buoyed in part by China's political calendar.

Many expect communist leaders to do whatever it takes to keep share prices up and avoid a public backlash ahead of a key party meeting in late 2007, when new leadership posts are due to be decided, and the Summer Olympics in Beijing next year.

The stamp tax increase "is an early move, so that even if the markets correct soon, they still have time to stabilise or even improve before the party meeting in the fall," said Citigroup's Shen.

Economists say a fall in the markets should have little impact on China's economy, because growth is driven by exports. Also, households have much more money in savings than in shares.

A fall in prices of even 20 percent is likely to have only a modest economic impact, J.P. Morgan economist Frank Gong said in a report to clients.

Gong noted that during a long bear market in 2001-2005, when the main market index fell from 2,300 to under 1,000 points, China's economy grew by about 10 percent per year.

The World Bank, in a report yesterday, raised its forecast of China's economic growth this year to 10.4 percent, up from 9.6 percent, and said its current account surplus could reach $340 billion.

The stamp tax was set at 0.6 percent when it was introduced in the early 1990s but has been cut repeatedly to encourage the Chinese public to invest in stocks. It fell to 0.1 percent in 2005.

Analysts have been forecasting a possible Chinese correction due to the sharp price rise, reducing the likelihood that markets abroad would be taken by surprise.