BEIJING -- Mainland China's flagship Shanghai bourse, which has seen outsized gains in 2006, took a drubbing Wednesday. The Shanghai Composite Index cratered 5.3% to 1590.

One mainland analyst blamed the Shanghai Comp's fall on profit-taking, given the index had shot up 45% year to date. Investors may also be preparing to reallocate funds into Bank of China, which is gearing up for an IPO in Shanghai following its blowout Hong Kong debut.

In Hong Kong, the Hang Seng Index also fell, closing down 1% to 15,817.

China shares were mostly down in Tuesday New York trading. Baidu ( BIDY) once again proved an exception, rising 7.9% to $89.85 -- possibly gaining on yesterday's news of rival Google's continuing service problems in China.

Wireless value-added service provider Tom Online ( TOMO) was off 3.9% to $20 and Linktone ( LTON) fell 1.5% to $6.60.

The duo, along with other wireless plays, have lately come under pressure on talk that leading cell-phone operator China Mobile ( CHL) will undertake a sector clean-up. Wireless value-added services let consumers use cell phones to send short messages, download ring tones, play games and access the Web.

On June 2, the Ministry of Information Industry, China's telecom regulator, said it would start cracking down on abusive fees in the short message service market. So far, nothing else has been formally announced, but rumors have circulated that China Mobile will embark on a self-policing drive to fend off more intervention.

Investors worry that broader regulatory moves might further crimp business, although the bigger value-added services companies have already curbed some of their more aggressive practices.

The problem stems from the gold-rush mentality in China's mobile-phone arena. Over the past five years, the nation's two mobile operators have handed out over 3,000 licenses to service providers, notes ThinkEquity analyst Michael Zhang. But the market remains highly fragmented. Cutthroat competition prompted a host of dodgy practices like spamming, price traps and other scam-ish behavior.

In fact, a crackdown on such dubious behavior might actually boost the biggest, most-credible value-added service providers, even if the near-term effect could be a little messy. "We expect the small and private service providers will be driven out of the market more quickly, which will ultimately give an advantage to the large service providers," said Susquehanna analyst Ming Zhao in a note.

For now, Zhao notes, the big players are still negotiating with China Mobile over how any changes would take place. As always in China, much would depend on the actual implementation of new policies.

"China Mobile definitely needs to clean up the small players and manage its overall value chain better. But if they're too radical, then they'll hurt their own data revenue," says Dong Ming Zhang, research director for Beijing-based telecom consultancy BDA China.

China Mobile has proven successful at boosting its non-voice revenue, which now accounts for about 20% of the total, she added. "That's a significant achievement -- ahead of operators in Taiwan, for example. It's a key benchmark the industry is looking for, so I don't think they'll go so extreme as to hurt their own growth."

In the meantime, until China Mobile clarifies its position, wireless value-added services shares could see some volatility.

But ThinkEquity's Zhang is bullish on the longer-term potential of the sector -- especially after a recent visit to South Korea, which, along with Japan, acts as a pan-Asia technology trendsetter.

Chinese consumers follow Koreans in their preference for communicating over mobile phones, which they favor over PC-based email. China also acquired its love of online games from Korea.

So Korea's technological evolution could be telling. With its mobile-phone penetration nearing 80%, Korea's value-added services market grew more than seven-fold to reach $3.4 billion in 2005.

With only one tenth as many mobile-phone subscribers, the value of China's services market stood at just over $1 billion last year.

In short, if China continues to track Korea, services have a bright future in the Middle Kingdom. Top Korean mobile carrier SK Telecom told Zhang it expects future growth in the wireless market to come from data services such as music, games and wireless Internet community applications.