Regulators might enact new capital gains taxes or other administrative measures if they decide the market is out of control, he said.

By the standard measure of price-to-earnings ratios, local currency-denominated "A shares" are trading at a relatively high average ratio of about 33 percent.

But many of the hottest stocks are at much higher levels. That includes market heavyweight China Life Insurance, now trading at a P/E ratio of over 100. China Life fell 4.4 percent to 38.21 yuan Wednesday in Shanghai.

China still limits foreigners' purchases of the yuan-denominated stocks that make up the biggest share of the markets, though that is gradually changing as regulators allow increasing participation by so-called foreign institutional investors.

Large caps led Wednesday's declines, with China United Telecommunications down 9.3 percent at 4.61 yuan, China Petroleum & Chemical falling 8.8 percent to 9.68 yuan, and property developer China Vanke off 9.4 percent at 15.31 yuan.

China Minsheng Banking sank 9.3 percent to 12.02 yuan even though the lender said early Wednesday that its 2006 net profit rose about 40 percent, above some analysts' forecasts of 30 percent-plus growth.

Other banks also fell, with Hua Xia Bank plunging by the daily 10 percent limit to 10.24 yuan and China Merchants Bank down 6.9 percent at 17.17 yuan.

Despite the potential for a correction, most analysts believe the market is bound to continue to climb in the long-term.

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

Chinese retail investors, bereft of lucrative investment options in a still immature capital market, have been shifting en masse back into stocks after years of staying away.

In currency dealings Wednesday, month-end U.S. dollar sales pushed the yuan higher. The dollar was at 7.7728 yuan on the over-the-counter market, down from Tuesday's close of 7.7750.

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