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China's shares fell the most in almost three weeks on speculation the government will reduce or remove the tax on interest income to tame a stock-market boom and cool the economy.

A source close to the central government said the Standing Committee of the National People's Congress will vote on a proposal authorizing the Chinese Cabinet to adjust or remove the tax on interest income next week. The result of the vote is expected next Friday, he said.

Anticipation of the tightening move saw the Shanghai Composite Index drop 3.29 percent to close at 4,091.4 points on Friday. At one stage, it slumped 4.87 percent.

A 20-percent tax on savings deposit interest for all renminbi and foreign currency accounts opened by individuals at Chinese banks was introduced in 1999, in a bid to reduce mounting individual savings at the time.

But the tax failed to deter people from squirreling away money into savings accounts over the past seven years until the stock market, which revived in 2006, began drawing increasing funds into stock investment.

Household yuan deposits in May fell by 278.4 billion yuan after sliding in April for the first time since February 2003, according to the People's Bank of China, the central bank. Some economists predicted around 4 trillion yuan to flow from banks to bourses this year.

The inflow of cash saw the major index climb to a record high of 4,269 points on Tuesday. The stock market had quickly rebounded in less than two weeks from a rout that erased more than US$400 billion of market value due to the stamp duty hike on May 29.

Ma Qing, chief economist for Morgan Stanley Greater China, said on Friday that an immediate money-tightening move was possible, based on the results of the central bank's second-quarter survey.

Morgan Stanley, Deutsche Bank and JPMorgan all said reducing or removing the tax on interest income would be a near-term measure to curb the overheating stock market and inflationary pressure.

(China Daily June 23, 2007)