Nov. 30 (Bloomberg) -- Chinese stocks fell, sending a key index to its steepest monthly slump in at least 12 years, after the government deflated a bubble that had caused prices to quadruple in a year.

PetroChina Co., the world's biggest company, and China Shenhua Energy Co., the nation's largest coal producer, led the decline. PetroChina tumbled 35 percent from a Nov. 5 high and Shenhua sank 32 percent from its Oct. 15 record close.

A rally this year turned PetroChina into the world's largest company by market value and made Industrial & Commercial Bank of China Ltd. the biggest bank. Five interest rate increases by the central bank in 2007 and higher taxes on share trading sent the CSI 300 Index down 19 percent from its Oct. 16 record.

``Continued talk of further monetary tightening is weighing on the market,'' said Shane Oliver, who helps manage the equivalent of $103 billion, including China's A shares, at AMP Capital Investors in Sydney. ``The correction may not have run its course. The market has risen dramatically and got ahead of itself and is due for a pullback.''

The two-year-old CSI 300 Index dropped 104.66, or 2.2 percent, to 4,737.41 today, taking its drop this month to 17 percent, the most on record. The Shanghai Composite Index sank 2.6 percent to 4,871.78. It fell 18 percent in November, the most since Bloomberg started tracking the measure in February 1995.

U.S. billionaire Warren Buffett said last month investors should be ``cautious'' about China's stock market. Six months ago, Li Ka-shing, China's richest man, said it ``must be a bubble.''

Expensive Stocks

China Merchants Bank Co. led the nation's lenders lower today on speculation the government will raise interest rates further. Baoshan Iron & Steel Co. declined after China agreed to eliminate tax rebates on steel exports to the U.S.

The CSI 300 Index, which tracks shares on the Shanghai and Shenzhen exchanges, is still up 132 percent this year, making it the world's best-performing national index of 90 benchmarks followed by Bloomberg.

Chinese stocks have risen this year as households shifted more of their $2.3 trillion of savings into the equity and property markets in search of returns to beat inflation. Consumer prices rose 6.5 percent in October from a year earlier, the biggest advance in more than 10 years, compared with the one-year bank deposit rate of 3.87 percent.

The yuan's 6.1 percent appreciation against the dollar in the past year has also increased the appeal of assets denominated in China's currency. Share-price gains have made Chinese shares Asia's most expensive.

Bear Market?

Shares on the CSI 300 trade at an average 42 times reported earnings, according to data compiled by Bloomberg. The MSCI Asia Pacific Index and the Standard & Poor's 500 Index are valued at 18 times.

The People's Bank of China has raised interest rates and ordered banks this month to set aside the highest level of deposits in reserve since at least 1987 to slow the economy's 11.5 percent annualized growth in the third quarter.

The latest decline in China compares with a 21 percent decrease in Japan's Topix index from its 2007 high in February to Nov. 22, the first of the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime-mortgage collapse. A 20 percent drop within 12 months is considered by traders as the start of a bear market.

The Shanghai Composite Index, developed in December 1990 to track stocks listed on the bigger of China's two exchanges, plunged by more than 50 percent in the last bear market, from June 2001 to July 2005. It has jumped almost fivefold since its low on July 11, 2005.

Higher Rates?

China's government should raise interest rates and consider selling state-owned shares to control the build-up of a ``bubble'' in the country's stock market, Zhu Mingchun, research head of the finance and economic committee under the National People's Congress, said in a speech today.

PetroChina almost tripled on its first day of trading in Shanghai on Nov. 5. It became the world's first company valued at $1 trillion, more than Exxon Mobil Corp. and General Electric Co. combined. The stock has slumped 32 percent from its high.

PetroChina dropped 1.53 yuan, or 4.6 percent, to 31.52 yuan today and Shenhua retreated 3.08 yuan, or 4.6 percent, to 64.35.

Merchants Bank, the nation's biggest dual-currency credit- card issuer, fell 0.90 yuan, or 2.2 percent, to 39.25. China Construction Bank Corp., the country's second-largest bank, slid 0.18 yuan, or 1.7 percent, to 10.20.

China will raise its lending rate by 108 basis points by the end of 2008 to help cool expansion, according to Credit Suisse Group analysts Vincent Chan and Jason Baverstock, in a report today. One hundred basis points make a percentage point.

Stock market valuations ``will be hurt by the higher cost of funds and uncertainty regarding the tightening policy,'' according to the report.

Baoshan Steel, China's biggest maker of the alloy, retreated 0.59 yuan, or 3.9 percent, to 14.52 today. Angang Steel Co., the country's third-largest steelmaker by output, lost 0.91 yuan, or 3.6 percent, to 24.44.

To contact the reporter on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net; Chua Kong Ho in Shanghai at kchua6@bloomberg.net.

Last Updated: November 30, 2007 04:38 EST