SHANGHAI — Faced with a difficult combination of an economy addicted to cheap credit, exorbitant real estate prices fueled by that credit and mounting public concern that housing is no longer affordable, China’s government is laying plans for steep new taxes on home sellers.
But those plans set off a sharp drop in Chinese stocks on Monday, as investors worried that the taxes could take a heavy toll on developers, an important sector of the Chinese economy. Any slowdown in real estate investment could ripple quickly across the entire economy, reducing demand for steel, cement, household appliances and many other mainstays of China’s manufacturing-dependent economy.
China’s cabinet, or State Council, said late Friday that it would insist that home sellers pay a uniform 20 percent capital gains tax on their profit. The government also said it would make it harder for people to buy a second home.
Because China, as the world’s second-largest economy behind the United States, now plays an increasingly important role in global demand for many goods, the drop in Chinese share prices quickly reverberated through stock and commodity markets across Asia. Stocks in Europe also fell; in the United States the stock market dipped early but recovered to register modest gains by the end of the day.
Fearing a real estate bubble, the Chinese government began imposing a series of administrative measures through 2011 and engineered a slowdown in bank lending that, by last spring, had turned into an actual credit squeeze. Real estate prices weakened slightly, but the measures also resulted in a steep deceleration in the construction industry last spring and summer, causing a sharp slowdown in economic growth across China.
“This shows the government is determined to dampen the property market,” said Patrick Chovanec, chief strategist at Silver Crest Asset Management in New York and a former professor at Tsinghua University in Beijing. “But they go through cycles when they want to pump up the economy, and then they want to cool it down. And this is what’s happening again.”
The slowdown alarmed China’s leaders and prompted them to unleash a flood of fresh credit last autumn and this winter from banks, semiregulated trusts and other sources.
With loans readily available again, there are signs now that rising real estate prices might be back. The National Statistics Bureau reported that prices jumped in 54 of the 70 cities tracked by the government in January. In Shanghai, for example, average property prices were up as much as 40 percent in the first two months of the year, compared to the same time last year.
“Despite the policy-induced slowdown in activity, Chinese property remains on a wildly unsustainable path,” Mark Williams, an economist at Capital Economics, wrote in a research note. “Developers actually completed just short of 11 million properties last year.”
In another worrying trend for the Chinese government, the flood of credit in the last few months has failed to cause a sharp uptick in sectors other than real estate; instead, the Chinese economy seems to be settling into a slower long-term growth rate even when receiving strong monetary stimulus.
The Chinese state news media said in recent days that the government was considering other measures in the hope of holding down housing prices. The announcements led to a weekend rush among those eager to buy and sell properties before the policy took effect.
With analysts predicting a sharp drop in property transactions after the policy takes effect, the Shanghai composite index fell 3.65 percent Monday to close at 2,273.40. In Hong Kong, the Hang Seng Index dropped 1.5 percent, to 22,537.81. Property developers were hit particularly hard. Shares of Vanke, one of the biggest property developers in China, fell the daily limit of 10 percent in Shenzhen. Poly Real Estate also dropped 10 percent in Shanghai.
David Barboza reported from Shanghai and Keith Bradsher from Hong Kong.
Article source: http://www.nytimes.com/2013/03/05/business/global/chinese-stocks-fall-on-steps-to-curb-property-prices.html?partner=rss&emc=rss