Shanghai's benchmark stock index plunged 8.84 percent yesterday - the biggest single-day drop in a decade - after profit taking by institutional traders led to panic selling among individual investors.

The Shanghai Composite Index, which tracks yuan-denominated A shares and hard-currency B shares, closed at 2,771.79. Trading volume soared to a record 131.6 billion yuan (US$16.57 billion), up 42 percent from the previous day.

On the smaller exchange in Shenzhen, the Composite Index dropped 8.54 percent to 709.81.

Yesterday's performance was a marked turnaround from Monday's session - the first after the weeklong Spring Festival - when the Shanghai index gained 1.4 percent to close at a record 3040.6

"The fact that a tumble occurred was no surprise to us, as the country's key index has been trading at record levels, and many stocks are considered overvalued," said Dai Ming, an analyst at Kingsun Investment Management Co. Dai, admitted, however, that the size of the drop was unexpected.

"Selling sentiment might continue for some time if there is no strong policy stimulus from the government."

Dai pointed out that stocks normally post price-to-earnings ratios of 15 to 20, but some stocks listed on the country's two bourses are trading above 30.

Yesterday's downturn was the largest since February 18, 1997, when the market plummeted 8.91 percent following the death of Communist Party elder Deng Xiaoping.

Blue-chip stocks led the declines, and major industries including real estate, banking, steel and auto manufacturing all suffered big losses.

China Vanke Co, the nation's biggest listed property developer, and China United Telecommunications Corp, the country's second-largest mobile carrier, plunged by the 10 percent daily limit.

China Vanke shares lost 1.58 yuan to close at 14.26 yuan, and United Telecommunications chips dropped 0.54 yuan to 4.89 yuan.

Baoshan Iron & Steel Co, China's biggest steel maker, slid 1 yuan to 9.03 yuan.

Tang Xiaowu, an analyst at Huatai Securities Co, suggested that individual investors may want to unload some of their stocks to reduce risks.

Stock prices doubled last year after all previously state-held, non-tradable shares were turned into tradable equities.

(Shanghai Daily February 28, 2007)