Shanghai stocks suffered their sharpest fall in five years on yesterday after an 8 per cent slide late in the day cast doubts on the stability of a market that had rallied by almost a quarter in less than three weeks.

The benchmark Shanghai Composite broke a run of three-year highs to close 5.4 per cent lower at 2,856.27 in a move that Citigroup analysts dubbed the “Shanghai scare”. The retail-dominated market, which had been more than 2 per cent up in the early afternoon, is still up 35 per cent this year, leading to fears of a bubble.

The rally was triggered by the central bank’s interest rate cut last month, its first in more than two years. Expectations that this might presage more monetary easing contrasted with preparations for tightening by the US Federal Reserve.