The highest daily slump to hit China's stock markets for ten years on Tuesday triggered a domino effect on global capital markets.

Industry observers said on Wednesday that the shock waves felt around the world were a clear sign that China's stock markets have become an important barometer for the world financial community.

"If the Chinese markets catch a cold, the major markets around the world will sneeze," Teng Yin, an analyst with Everbright Securities, quipped.

"This is the first time that Chinese stock markets have affected global markets significantly, but it won't be the last," Teng said. "The reason is China's growing economic power."

Hou Ning, a commentator with China's leading portal website Sina, echoed Teng. "The 'China Factor' is becoming an influential link in the global economy," he said.

On Tuesday, the benchmark Shanghai Composite Index fell 268.81 points, or 8.84 percent, the highest daily drop since February 1997. The component index on the smaller Shenzhen bourse plummeted 797.88 points, or 9.29 percent.

Of the 1,327 negotiable shares on the two exchanges, 1,265 ended the volatile trading day with losses, with 1,072 falling by at least seven percent and around 800reached the daily plummeting limit of 10 percent.

The plunge was led by heavyweights in the steel, nonferrous, electric power, retailing and pharmaceutical sectors.

After the two markets on the Chinese mainland took the big hits, Hong Kong's blue chip Hang Seng Index fell 360 points, or 1.8 percent.

Wall Street was no exception. The Dow Jones industrials dived 416.02 points, or 3.29 percent, the Standard & Poor's 500 dropped 50.33 points, or 3.47 percent, and the Nasdaq composite index was down 96.65 points, or 3.86 percent. The downward adjustments reportedly also stemmed from growing concerns about the slowing of the economy in the U.S.

Canada's stock market in Toronto declined 364 points, a largest slump in three years, with materials, financial and energy shares bearing the brunt.

While China's economy has climbed to be the fourth largest in the world, becoming the biggest copper importer and the second biggest oil consumer, the Toronto stock market, with its many mining and oil companies, experienced a growth of 9.6 percent over the past few years.

Tuesday's shock waves also extended to European markets, which are also highly responsive to North American bourses. Britain's FTSE 100 was down 2.28 percent, Germany's DAX index was down 2.44 percent, and France's CAC-40 was down 2.87 percent.

According to some industry observers, the loss of approximately 800 billion yuan (102 billion U.S. dollars) in market capitalization on the two Chinese mainland bourses, was due largely to profit-taking by heavyweight mutual funds. Others believed the panic was caused by rumors that capital gains tax would be increased by the central government, a rumor that the Ministry of Finance and the State Administration of Taxation both denied on Wednesday.

At the end of last year, the taxation administration began to stipulate that individuals with an annual income of more than 120,000 yuan (15,584 U.S. dollars) declared their income, including earnings on the capital market. The move was seen as a prelude to the capital gains tax.

But sources with the taxation administration said this was an misunderstanding. They told Xinhua that no tax would be levied on capital gains at the present time.

Since 1994, China has exempted retail investors in equities from individual income tax on capital gains.

Some market analysts also said that a latest rise in the central bank's deposit reserve ratio was another factor behind Tuesday's share panic. In the latest hike, the central bank required commercial banks to set aside 10 percent of their deposits starting from Feb. 25, up from 9.5 percent.

Analysts believe excess liquidity, supported by an increasing money supply from the central bank and capital flow from residential savings accounts to domestic capital markets, will continue to maintain the value of equities after the major correction.

On Wednesday, Chinese shares staged a strong rally, bouncing back from the heaviest losses in ten years..

The benchmark Shanghai Composite Index surged 109 points, or 3.94 percent, to close at 2,881.07 points.

The Shenzhen Component Index jumped 248 points, or 3.19 percent, to end at 8,039.70 points. Turnover on the two bourses totaled 136.08 billion yuan (17.01 billion U.S. dollars).