The benchmark Shanghai Composite Index dropped 4.03 percent to close at 3,914.20 points after moving between 3,912.81 and 4,113.28.

China's top legislature started to debate a proposal on giving the State Council, or the cabinet, the power to reduce or cancel the interest tax. Voting is set to take place on Friday.

If the proposal passes and a tax reduction or abolition follows, bank savings will become more attractive, the China Daily said. That would help ease a diversion of deposits to the equity market, widely believed as a major factor driving up the high-flying stock prices.

Another proposal lawmakers are discussing came from the Ministry of Finance which has suggested issuing up to 1.55 trillion yuan of special bonds to fund purchases of foreign reserves for the yet-to-be-established State Investment Company.

Adding to investor jitters, Yi Gang, the assistant central bank governor, said his agency is determined to make use of a range of monetary policy tools to curb inflation, including interest rate hikes.