Chinese shares rebounded in a volatile trading session yesterday as retail investors recovered some of their confidence a day after the latest official move to damp down the market.

After tumbling 6.5 per cent on Wednesday, shares initially fell as much as a further 4 per cent, in a continued fallout from government moves to cool the market with a tripling of stamp duty on trading.

But shares recovered as investor mood swung sharply, with the benchmark Shanghai Composite closing 1.4 per cent up on the day at 4,109.6. It had even been up as high as 3 per cent in late trade.

Analysts said that although it was too early to fully assess the reaction of investors to the tax rise, the fact that the market had rebounded so soon after the announcement was not good news for the authorities, which had been hoping for a gradual decline in share prices.

"The tax increase on Wednesday shows that the government is very concerned about the level of the stock market," said Jason Chang, economist at Standard Chartered Bank in Shanghai.

"But if the rally continues over the next few days, the government will be concerned and might introduce further measures."

The boom in the mainland market - which has quadrupled since mid-2005 - has been partly underpinned by a surge in retail investment that has led to more than 1 million new share trading accounts being opened each week. In an indication that many new investors have not been put off by the government measures, a total of 426,000 new trading accounts were opened on Wednesday - one of the highest ever daily figures - suggesting that some people saw the slump in share prices as a buying opportunity.

Chinese stocks are rising too quickly and a market crash would undermine investor and consumer confidence in the country's economy, according to deputy central bank governor Wu Xiaoling.

But if China's economic reforms succeed, the yuan may strengthen against the dollar though the country would ignore any external pressure for its currency's appreciation, she told a seminar on global imbalances.

"In my view, every market develops in twists and turns. In my view, the Chinese stock market is growing too rapidly. We hope it can grow in a more steady manner," Ms Wu said.

In an apparent reference to a sharp fall on Wednesday in the Shanghai index, Ms Wu said if the stock markets failed to develop in a stable way, investor confidence in China could be hurt, affecting consumer demand.

She had earlier said that higher consumption in China was the key to reducing the country's huge trade surplus and helping to unwind global economic imbalances in an orderly way.

"We believe that if the stock exchange in China cannot develop steadily, it will have an impact on the confidence of the economic development and have a psychological impact on the rest of the world," Ms Wu said.

She expressed optimism about the world economic outlook, saying the yuan may appreciate, as sought by the United States, under China's policy of increasing the flexibility of its exchange rate.