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Chinese stocks, the world's best performers this year, fell after the country's central bank raised interest rates to cool an investment boom in the world's fastest-growing major economy.

The CSI 300 Index, which tracks yuan-denominated A shares listed on the country's two exchanges, dropped 52.13 points or 1.4 percent to 3724.50 at 9.36am, after falling as much as 3.5 percent.

The measure has climbed 88 percent in dollar terms this year, leaving it valued at 35 times estimated earnings. It's the most expensive of the world's 10 largest stock markets, according to data compiled by Bloomberg.

The gains have prompted investors including Li Ka-shing, Asia's richest man, to voice concern that a bubble may be building.

"I am concerned about the A share market,'' said Jing Ulrich, Hong Kong-based chairwoman of China equities at JPMorgan Chase & Co "It appears to be full-blown mania. Valuations are very rich.''

Higher interest rates may curb demand for loans including mortgages. Bank of Communications Ltd., China's sixth-biggest lender, and China Vanke Co., the country's largest publicly traded real estate developer, are the top contributors to the CSI 300's surge this year.

The People's Bank of China announced the increase in interest rates, the fourth in the past year, after the market closed on May 18. The central bank also ordered banks to put aside more money as reserves and widened the yuan's daily trading limit against the dollar.

The one-year benchmark lending rate was raised to the highest in more than eight years at 6.57 percent from 6.39 percent, the central bank said. The one-year deposit rate was increased to 3.06 percent from 2.79 percent.

"The Chinese economy is really heated and they had to tighten,'' said Frederick Jiang, manager of the US$485 million Ivy Pacific Opportunities Fund at Waddell & Reed Financial Inc in Overland Park, Kansas. "It's bad for liquidity. It's bad for earnings.''

Editor: Yan