China’s soaring stock market is at risk of “a marked correction” that could have a knock-on effect on its entire banking system, the OECD said yesterday, adding its voice to a litany of bearish warnings on the country’s share prices.

The danger has arisen despite growth of nearly 11 per cent last year and a projected acceleration in consumer spending ahead, the Paris-based Organisation for Economic Cooperation and Development said.

Its warning came as President Bush told Wu Yi, China’s Vice-Premier, that the United States was watching “very carefully” the movement of the Chinese yuan, after talks in Washington between the two powers failed to reach a breakthrough on the currency.

In its twice-yearly Economic Outlook, the OECD said: “The existing level of share prices [in China] appears to carry the risk of a marked correction should it appear that the current growth of profits cannot be maintained.” Slower export growth could be the trigger, it argued.

It added that share purchases by individuals were increasingly funded by bank borrowing: “Such loans could turn sour if there were a fall in prices, thereby adversely impacting bank balance sheets.”

The OECD’s fears echoed those of Alan Greenspan, the former US Federal Reserve Chairman, who argued that China’s equity market was heading for a dramatic contraction.

Chinese stocks seesawed in trade but shrugged off the warning from Mr Greenspan and another from the market regulator.

The Shanghai Composite Index recovered its equilibrium after an early fall of as much as 2 per cent, to close down 0.54 per cent at 4,151.13 points.

Earlier, it hit a record intraday high before Mr Greenspan’s comments became widely known. Turnover in Shanghai A shares was a massive 247.4 billion yuan (£16.4 billion), the second-highest figure to date.

Mr Greenspan told a tele-conference in Madrid on Wednesday that China’s equities bull run could not last. The market has surged more than 250 per cent in the past 18 months, and Mr Greenspan said it was heading for a “dramatic contraction”.

His comments did spur some selling in the Chinese market because some local investors were increasingly worried about a bubble.

In addition, the China Securities Regulatory Commission again told brokerages to focus on educating investors about risks – the latest in a series of official statements that analysts believe are aimed at cooling speculation in the market.

However, neither the government statements nor Mr Greenspan’s warning had any real impact on investors eager to profit from the market’s bull run. Most investors view as absurd the idea that the Government, which still wields huge influence over fund flows through administrative steps, would allow a crash. Analysts said that the market might consolidate gains for a few days before resuming its climb.

One development on Wednesday that boosted the market was China’s agreement with the US to lift the ceiling for foreign institutional investment in its stock market to $30 billion from $10 billion.

Mr Greenspan’s remarks triggered a surge of angry responses at his interference in China’s markets. “Imperialists and their running dogs don’t want to see a strong China – don't be fooled by foreigners,” read one anonymous but typical posting on eastmoney.com, a popular online forum for investors.

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