Chinese stocks took a tumble yesterday after the central bank raised the bank reserve requirement, for the ninth time this year, to cool off the economy.

It sparked a sell-off that knocked as much as 5 per cent from the benchmark index.

After a late rally the Shanghai Composite closed down 2.4 per cent at 5,187.74 points, continuing a bearish run in which the index last week suffered its biggest five-day drop in a decade.

Bank stocks slipped as investors worried that the 50 basis point rise in the reserve requirement – to a record 13.5 per cent – would constrain loan growth and profit margins for lenders.

“We expect much tighter liquidity for the rest of 2007,” said Lan Xue, head of China research at Citibank.

“As a result, we believe the strong performance for the banking sector, in particular for the small and medium-sized banks, is unlikely to be repeated in the near future.”

Huaxia Bank lost 2.9 per cent to Rmb19.19 while Industrial and Commercial Bank of China, the index's biggest stock, fell 2.2 per cent to Rmb8.17.

ICBC suffered in Hong Kong too, losing 5 per cent to HK$6.10.

It was not alone: the benchmark Hang Seng shed more than 1,000 points – 3.9 per cent – to close at 27,665.73, its lowest level in five weeks.

Oil stocks led the decline as crude prices slipped back. Sinopec and PetroChina tumbled 8.2 per cent and 7.3 per cent respectively to HK$10.04 and HK$14.96.

China Eastern suffered the day's biggest plunge, losing 17 per cent – its largest drop since the September 11 terror attacks – to HK$1.34 after investors abandoned hope of a bidding war for the stake the company is selling to Singapore Airlines.

Hong Kong's mood was hit by talk that the scheme to allow mainland citizens to invest directly in Hong Kong-listed shares would be delayed by at least a quarter. Hong Kong-listed China stocks, or H-shares, have surged 40 per cent in the past three months in expectation of the scheme. They fell 6 per cent yesterday.