Jan. 31 (Bloomberg) -- China's stocks tumbled the most in at least 21 months after a lawmaker said shares are overvalued, fueling speculation the government will act to limit investment.

Only 30 percent of companies listed on the Shanghai Stock Exchange ``are good to invest in by Western standards,'' and investors in the remaining 70 percent will probably lose money, Cheng Siwei, vice chairman of the National People's Congress, said yesterday at a conference in Dubai.

``There is already a bubble here,'' said Zhang Ling, who oversees about $1.1 billion at ICBC Credit Suisse Asset Management Co. in Beijing. ``Concern is mounting that the government will intervene to pop the bubble.''

The Shanghai and Shenzhen 300 Index, which tracks yuan- denominated A shares listed on China's two exchanges, plunged 166.55, or 6.5 percent, to close at 2385.33, cutting this month's gain to 17 percent. That's the biggest one-day drop since the measure was introduced in April 2005.

Of the 300 stocks included in the index, 292 fell. China Vanke Co., the nation's largest publicly traded property developer, and China Merchants Bank Co. led the decline, which was the steepest among markets included in global benchmarks.

The Financial Times, which sponsored the Dubai conference, quoted Cheng as saying China's stock market showed signs of a ``bubble.''

``Every investor thinks they can win,'' the paper quoted him as saying. ``But many will end up losing.''

China Vanke, Baoshan

China Vanke slumped 1.59 yuan, or 9.4 percent, to 15.31 and China Merchants Bank, the nation's third-largest lender, slid 1.28 yuan, or 6.9 percent, to 17.17. Citic Securities Co., the No. 1 brokerage, lost 2.71 yuan, or 7.2 percent, to 34.96 and Baoshan Iron & Steel Co., the biggest steelmaker, tumbled 0.87 yuan, or 8.2 percent, to 9.77.

The Shanghai and Shenzhen 300 more than doubled in the past 12 months as a government plan to make more than $200 billion of state-owned stock tradable revived investor demand, and economic growth that's averaged 10 percent for the last five years helped boost companies' earnings.

Overseas investors, who require government approval to buy yuan-denominated securities, have also been pumping in funds, increasing their holdings of local-currency shares to 97.1 billion yuan ($12.5 billion) at the end of 2006, from 34.7 billion yuan a year earlier, the Shanghai Securities News reported Jan. 25.

`Irrational Levels'

Profits haven't risen as fast as share prices though and the Shanghai and Shenzhen 300 is now valued at 36 times earnings, about double what it was a year ago. That's the highest among 13 regional benchmarks tracked by Bloomberg and compares with the 19 times earnings that the Morgan Stanley Capital International Asia-Pacific Index is valued at. The MSCI index, which today fell as much as 0.8 percent, gained 8 percent in the past year.

The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, slid 4.9 percent today to 2786.33, falling by the most since June 7. The Shenzhen Composite Index, which covers the smaller one, declined 5.8 percent to 655.53.

``Gradual corrections from irrational levels are better than a sudden burst,'' said Leo Gao, who helps manage the equivalent of $2.3 billion with APS Asset Management Ltd. in Shanghai. ``The government is right to tighten the regulations without intervening in the market.''

Lending Curbs

China's banking regulator has ordered banks to stop lending to companies and individuals that use the money for stock investments, the state-owned Shanghai Securities News reported Jan. 27.

Policy makers have also been trying to curb lending. The People's Bank of China, the central bank, ordered banks to boost reserves four times in the past year to reduce money available for investment. Banks now must set aside 9.5 percent of deposits after a half-percentage-point increase on Jan. 5.

Huaxia Bank Co., partly owned by Deutsche Bank AG, and Tsingtao Brewery Co., China's largest beermaker, both fell by the maximum daily limit of 10 percent today. The shares closed at 10.24 yuan and 17.37 yuan respectively.

A rebound in oil prices contributed to slides in China Petroleum & Chemical Corp., Asia's biggest refiner, and Air China Ltd., the country's largest international airline.

Crude oil jumped 5.5 percent to $56.97 in New York yesterday, the highest closing price since Jan. 3 and the biggest one-day gain since Sept. 19, 2005, on signs an improving U.S. economy and colder weather may spur demand.

China Petroleum, Asia's biggest oil refiner, also known as Sinopec, slid 0.93 yuan, or 8.8 percent, to 9.68. Sinopec Shanghai Petrochemical Co., China's largest maker of ethylene, lost 0.36 yuan, or 4.9 percent, to 6.94.

Oil Costs

China's oil refiners need government approval to raise selling prices, limiting their ability to pass rising crude costs on to customers.

Air China dropped 0.60 yuan, or 7.8 percent, to 7.06. China Southern Airlines Co., the nation's biggest carrier by fleet size, slid 0.30 yuan, or 5 percent, to 5.73.

``The jump in oil prices has weakened confidence,'' said Fan Dizhao, who helps manage the equivalent of $1.8 billion at Guotai Asset Management Co. in Shanghai. ``Refiners and airlines are obviously the first to suffer from rising crude.''

To contact the reporter on this story: William Bi in Beijing at wbi@bloomberg.netZhang Shidong in Shanghai at at szhang5@bloomberg.net

Last Updated: January 31, 2007 07:08 EST