As shares tumble around the world, the focus in Asia is increasingly falling on how rising star China weathers what is effectively its first storm.

It looks like the spillover from the subprime investment downturn is even hitting China and the country is gearing up for the first significant hurdle in two decades of breakneck economic growth.

Just like everywhere else, Shanghai's stock index lost 7.7 per cent yesterday, a change in direction that will shock a whole new generation of investors who have never seen a market fall.

It is this shock that has the government rattled because of the possible effects on social stability.

"Two of the three stocks I hold fell sharply today . . . 5,000 yuan (€471) disappeared in a few days. I just want to cry. I want to tell everybody I know: keep away from the stock market," said one new investor, Dai Yu.

Another investor, Yi Ran, said: "Tomorrow is a day fraught with grim possibilities."

The declines in the stock market come at a time of rising inflation, which is causing widespread concern on the streets.

Consumer price inflation hit an 11-year high of 6.9 per cent in November and punters are particularly upset by its effect on the price of the staple meat, pork.

The economy remains fundamentally sound and likely to withstand with ease a slowdown in the US, but nerves are rattled.

Markets are bracing themselves for when the country's second-biggest lender, Bank of China, feels the brunt of the subprime losses when it records a multi-billion-pound deficit on €5.3 billion worth of US mortgage-backed securities investments.

Bank of China's Shanghai-listed A-shares were suspended from trading yesterday morning, pending an announcement, although the company said it was "not aware of any reasons" for the unusual movements in its share price.

The speculation in the market was that the bank would write down $2.4 billion (€1.65 billion) for the fourth quarter of 2007 and an equal amount for this year. Keeping confidence in the banking sector is vital to China's economic well-being. For many years, the banks have been plagued with allegations they have not made adequate bad debt provisions.

On the day when Bank of China shares were suspended, the China Banking Regulatory Commission said it was planning to develop a system of monitoring big banks' gains and losses of investment in subprime mortgages by next month.