SHANGHAI — Zhang Mei sat inside a packed, smoke-filled stock trading hall here Wednesday, still pained by the sudden fall a day before in share prices that cost her almost a tenth of her retirement funds.

“I don’t understand why it dropped so much,” said the retired department store employee, recounting how she raced to the banks of computers here Tuesday in a fruitless bid to sell before the market closed. “It was already too late. There were too many people waiting for computers.”

Shanghai’s benchmark index plunged 8.8 percent on Tuesday, the largest drop in a decade, in part because of rumors that Beijing would stop policies that encourage stock investments.

Beijing tried to put a stop to those rumors on Wednesday.  

The value of China’s Shanghai and smaller Shenzhen stock markets has jumped from $400 billion at year-end 2005 to about $1.4 trillion as of Tuesday, with much of those gains coming in the last six months.

Some analysts say senior Chinese officials have concluded that China’s stock market is a bubble and that they need to let some of the air out — just as Beijing has tried to do with the property market, only to learn that it isn’t easy to do. Chinese regulators have been alarmed about people mortgaging their homes and borrowing funds from banks and pawn shops to speculate on the stock market.

Zhang and millions of other Chinese have jumped into the stock market in the last two years, plowing their low-interest earning bank savings into high-flying shares. The Chinese are prodigious savers. But Beijing fears a collapse of an overheated market, threatening social unrest and political stability.

Although less than 2 percent of China’s population has a direct stake in the stock market — compared to 60 percent in the United States — nearly 8 percent of Chinese in cities hold active individual stock accounts, said Lian Weipei, a stock analyst in Shenzhen.

Given the fact that several large firms dominated the stock market, analysts said, it only takes a little profit-taking to pull down the overall index.

“Beijing would like to see the market stabilize … and then resume a gradual rise path,” said Stephen Green, a senior economist at Standard Chartered Bank in Shanghai. “Of course, the challenge is that they have to combat general bullish sentiment and ample liquidity.”

Indeed, even as some investors were brooding at trading halls Wednesday, new investors were joining the action.

“It’s normal for it to drop, but the market will come back,” said Wang Zhen, 27, a teacher here, who came to open a new account. She planned to plow $2,500 into stocks. “I think the market is still good now.”

Chinese government shores up market    

 Bullish comments in China's state-controlled media Wednesday appeared to reassure anxious investors, who account for virtually all trading here,  a day after the Shanghai market took its biggest losses in ten years.

China's Shanghai Composite Index bounced back 3.9 percent to close at 2,881.07, rebounding from its 8.8 percent plunge Tuesday.

 China will focus on ensuring financial stability and security, the official Xinhua News Agency cited Premier Wen Jiabao as saying in an essay due to be published in Thursday's issue of the Communist Party magazine Qiushi.

Other Chinese regulators shifted into damage control, as a government-run newspaper denied rumors of plans for a 20 percent capital gains tax on stock investments — thought to be a key factor in the markets’ plunge the day before.

The government has no plans to levy a tax on capital gains from stocks, the Shanghai Securities News said in a front-page report, citing unnamed spokesmen for the Ministry of Finance and State Administration of Taxation.

The newspaper, run by the official Xinhua News Agency, is often used for official announcements.