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Chinese stocks plummet more than six percent on Wednesday after an announcement of a hike in stamp tax on stock trading.

The benchmark Shanghai Composite Index has lost 6.08 percent to 4,071.27 points at the end of morning trading after opening 5.78 percent lower.

Shares of brokerages were hardest hit due to concerns that the tax would lead to decreased market turnover which in turn will affect brokerage revenue. CITIC Securities and Hong Yuan Securities both opened down their 10 percent daily limits.

China Life fell 6.76 percent to 37.27 yuan, followed by Ping An Insurance of China which went down 6.14 percent to 60.99 yuan.

The Ministry of Finance announced Tuesday night the stamp tax on stock trading will rise to 0.3  percent from 0.1 percent starting from Wednesday, in the authorities' latest move to cool down the country's runaway equity market.

A ministry official said the move is intended to help promote the healthy development of the securities markets.

Analysts said the tax hike could dampen the market in the short term, but would not cause a crash or reverse a long-term uptrend.

Ha Jiming, chief economist of China International Capital Corporation said the hike will increase investors' transaction cost and is expected to curb short-term speculative activities. But the influence on long-term investment is limited.

"The hike will neither reverse the upward trend of the stock market, nor lead to consistent downfalls," he said before describing the hike as good news for the long-term healthy development of China's capital market.

The policy will help the market become more rational, said Ha. However, to return full sobriety to the market, the government need to come out with more policies.

He Qiang of Central University of Finance and Economics deemed the new policy's influence largely "psychological".

"Currently, the investors' return from the stock market is high," said he. "The stamp tax hike will increase the transaction cost, but is unlikely to bring about substantial reduction to the high return."

The fiscal measure came after a series of monetary tools by the central bank failed to produce marked results in cooling down the market. The Shanghai Composite Index, the most widely watched indicator of the mainland's stock market has soared more than 60 percent so far this year on top of a 130 percent rally in 2006.

China's central bank has raised interest rates twice and bank reserve requirement four times this year. However, the stock market ignore the signal and rose on the first trading day after each tightening.

The booming is partly driven by the flood of new investors. The number of stock accounts, including A-, B-shares and closed-end funds in the Shanghai and Shenzhen stock exchanges reached 100.27 million by Monday, according to statistics from the China Securities Depository and Clearing Corporation.

The stock market frenzy has aroused mounting bubble concerns, from both home and abroad. The latest warning came from former chairman of US Federal Reserve Alan Greenspan who warned last week China's stock market was clearly unsustainable and faced a dramatic contraction.

Greenspan's remarks followed warnings from Asia's richest man, Li Ka-shing who said China's stock valuations "must be a bubble" and prices are likely to decline. Central Bank governor Zhou Xiaochuan also expressed concerns earlier this month.

Some analysts have been advocating the adoption of fiscal measures, including the hike of the stamp tax which is collected based on transaction turnover and is levied on both sellers and buyers.

In the 16-year-plus history of China's stock market, a stamp tax hike usually led to a slump.

China started to collect a stamp tax on the Shenzhen Stock Exchange in July, 1990, but only on sellers at 0.6 percent. Four months later, the buyers were also subject to the tax.

The tax triggered a downturn in the Shenzhen market, forcing authorities to cut it in half to 0.3 percent in October 1991. At the same time, the Shanghai Stock Exchange also began collecting duty on both sides of trades.

On May 10, 1997, the tax rate was upped to 0.5 percent, partly blamed for a bear market that lasted until mid-1999. The rate was lowered to 0.4 percent in June, 1998 before being adjusted to 0.3 percent one year later and to 0.2 percent in 2001.

Regulator further lowered the duty in January 2005 to 0.1 percent in order to boost stock prices during a market slump lasting from 2001 to 2005.

Editor: Yan