Chinese shares tumble 5% on fears bubble will burst

That loud hiss you hear is the sound of some air escaping from China’s stock markets.

For months an equity bubble had been growing in China, led by a rush of investment after authorities instituted reforms aimed at controlling price manipulation and other abuses that had made investors shy away from Chinese shares.

On Wednesday, Chinese shares tumbled nearly 5% in their biggest one-day loss in eight months amid mounting worries that the bubble was about to pop.

Analysts said the decline, led by blue chips, probably signaled a respite after weeks of continued record highs.

The Shanghai composite index fell 4.9% to 2,786.33, its biggest one-day decline since a 5.3% tumble June 7, 2006. The smaller Shenzhen composite index slid 5.8% to 655.53.

“Many traders felt a push to cash out, for even blue chips, such as banks, are trading at high valuations,” said Hao Guomei, an analyst at Huatai Securities Co.

Wednesday’s decline followed warnings from the Shanghai Stock Exchange and other regulators over rising risks from the market’s recent bull run.

Before Wednesday’s tumble, the Shanghai index, which tracks China’s biggest companies, was up 9.5% for the year after soaring 134% last year. Trading volumes have been at record highs amid growing volatility.

China’s markets languished for years before reviving last summer after shareholder reforms and other measures helped bring price manipulation and other market abuses under control. Market sentiment has been further boosted by rebounding corporate earnings and an economy that has been growing at a rate of more than 10% a year.