China's stock market, after experiencing its sharpest daily fall in 10 years, saw a rebound of nearly 4 percent yesterday as the government allayed fears of a new capital gains tax.

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The Shanghai Composite Index, which plummeted 8.84 percent on Tuesday, closed 3.94 percent higher at 2,881.073 in heavy trade.

"Tuesday's move was profit-taking, not a fundamental shift in sentiment," said Stephen Green, senior economist at Standard Chartered Bank in Shanghai.

Meanwhile, officials at the finance ministry and the tax bureau said the government would not impose a capital gains tax on stock investments. The rumor was the catalyst for the big drop on Tuesday, analysts said.

Premier Wen Jiabao said yesterday the government would protect the safety and stability of financial markets, according to the Xinhua News Agency.

As China's major stock index recovered about half of Tuesday's losses, the rest of Asia fell yesterday.

"Tuesday suggested to some that China's stock market and the world's are now fundamentally linked; today's action pours cold water on that theory," Green said.

Although most analysts and economists are optimistic about the long-term performance of China's stock market, some analysts are forecasting more corrections.

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