Chinese real estate shares plunged and the stock market suffered its worst daily fall in 28 months on Monday after the government unveiled tough new policies to damp a rebound in housing prices.
The State Council, China’s cabinet, on Friday detailed a series of “control measures” to rein in the real estate sector. Housing prices, which the Chinese government had succeeded in stabilising last year, had started to surge in major cities in recent months, prompting Beijing to redouble its efforts.
In the latest announcement, the government called for strict application of a 20 per cent capital gains tax on home sales, a rule that has been in place since 2005 but only patchily enforced. It also said that cities where prices had been rising too quickly should adopt targeted measures, including higher mandatory mortgage downpayments and restrictions on the purchases of second homes.
The CSI 300, an index of the top stocks on the Shanghai and Shenzhen exchanges, fell 4.6 per cent, its worst day since November 2010. The shares of most major developers tumbled 10 per cent, the daily maximum in China.
Investors and analysts had been bracing for government action to cool the housing market after the recent rebound, but the package of policies “appears harsher than expected”, said Du Jinsong, a property analyst with Credit Suisse.
Delivered on the eve of China’s annual parliament, which formally opens on Tuesday, the announcement also signified the importance Beijing attaches to preventing a housing bubble.
Nevertheless, there was also much scepticism about how effective the latest official effort would be. Chinese media pointed out that it was the ninth set of “control measures” of the past 10 years, a decade during which housing prices surged nationwide.
Lu Ting, an economist with Bank of America Merrill Lynch, warned that the capital gains tax could have unintended consequences. “These new measures may inadvertently shift demand of existing homes to new homes, pushing new home prices to rise even faster,” he wrote in a note to clients.
Yin Bocheng, director of the real estate research centre in Fudan University, said there was also a question about whether cities would actually implement the tougher policies.
“There is a fundamental contradiction,” he said. “While the central government wants regulation, local governments want higher housing prices, which bring them land revenues.”
Chen Li, head of China equity research at UBS Securities, described the property measures as a “catalyst for a pullback”.
“We’ve seen a very strong rally in recent months, so people needed a reason to take some profits. The property measures are not the only reason for this correction,” said Mr Chen. “I don’t think investors will be fully surprised by the news.”
From the first week of December to the end of February, the CSI 300 rose more than 30 per cent, with property stocks among the best performing. However, since the start of February the index has dropped more than 7 per cent, as investors grew nervous after the People’s Bank of China began taking liquidity out of the market following the lunar new year holiday, Mr Chen added.
Chinese developers have been extremely active in the debt markets in recent months, and have been responsible for more than half the total high-yield bond issuance in Asia ex-Japan since last summer. So far this year, China’s property companies have raised more than $6bn in US dollar bonds, compared with $3.3bn in the fourth quarter of 2012, and $1.1bn in the third quarter, according to Dealogic.