China moves to stall boom
Chinese stocks dropped sharply on Monday after the government announced new policies aimed at curbing runaway property prices.
China's State Council on Friday said it would impose a 20 per cent capital gains tax on housing and it would introduce measures to make it harder to buy a second home.
The announcements led to a weekend rush among those eager to buy and sell properties before the policy took effect. While economists generally applauded the government moves, they also worried that a slowdown in China's robust construction industry could weigh on growth in the world's second largest economy.
With analysts predicting a sharp drop in property transactions after the policy takes effect, the Shanghai Composite Index fell 3.65 per cent on Monday and in Hong Kong the Hang Seng Index dropped 1.5 per cent.
Property developers were hit hard. Shares of Vanke, one of the biggest property developers in China, fell by the daily limit of 10 per cent in Shenzhen. Poly Real Estate also dropped 10 per cent.
The falls came as the government opened its annual parliamentary meeting, a session that is expected to complete the nation's leadership transition and set the agenda for the new team.
Among the challenges Beijing's leaders face is how to cope with a widening income gap between the rich and poor and how to address inflation and high housing costs. .
The National Statistics Bureau reported that prices jumped in 54 of the 70 cities tracked by the government in January. In Shanghai, average property prices were up as much as 40 per cent in the first two months of the year, compared to the same time last year.
"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."
Those 11 million should be more than enough to meet demand, Mr Williams added, even with millions of Chinese expected to migrate from rural areas to cities in the next few years.
Over time, the Chinese government has pushed up interest rates and set limits on lending, even going so far as to engineer a credit squeeze with the goal of slowing inflation as well as making it harder for speculators to borrow money.
The government also limited the number of mortgages for each borrower, raised the deposit for mortgages to as high as 40 per cent, and began experimenting with the introduction of real estate taxes.
Local governments took further measures. For example, the provincial government on Hainan Island, a popular holiday destination, sought to slow sales to buyers from other provinces last year by requiring that they prove that they either paid income taxes last year or paid into China's version of social security; evasion of these taxes is widespread.
Beijing also promised penalties for local governments that did not curb prices, saying that officials would "be held accountable".
40%
Average property price rise in Shanghai in the first two months of the year
20%
Capital gains tax on housing imposed by China's State Council
Frequently Asked Questions about this Article…
China's State Council announced a package of measures including a 20% capital gains tax on housing, steps to make it harder to buy a second home, limits on the number of mortgages per borrower, higher mortgage deposit requirements (up to 40%), tighter lending rules and interest-rate increases to engineer a credit squeeze, and experiments with real estate taxes. Local penalties were also promised for officials who do not curb prices.
Chinese stocks fell sharply after the announcements: the Shanghai Composite Index dropped 3.65% and Hong Kong’s Hang Seng Index fell about 1.5%. Property developers were hit hardest, with major developers seeing big losses.
The article cites Vanke and Poly Real Estate as being hit hard: both stocks fell the maximum daily limit of 10% in Shenzhen following the government's measures.
Economists say China’s construction industry is a major growth driver, so tougher measures that slow property transactions and building activity could weigh on overall growth. The article notes analysts predict a sharp drop in property transactions after the policies take effect, which could slow the previously robust construction sector.
The National Statistics Bureau reported prices rose in 54 of the 70 cities it tracks in January. In Shanghai, average property prices were up by as much as 40% in the first two months of the year compared with the same period a year earlier.
The article gives the example of Hainan province, which required buyers from other provinces to prove they paid income taxes last year or contributed to China’s social security system before they could purchase property — a measure aimed at slowing outside demand.
Yes. The policy announcements prompted a weekend rush by buyers and sellers trying to complete transactions before the new rules took effect. Analysts then warned of a likely sharp drop in transactions once the measures were enforced.
Investors should watch property transaction volumes and housing price data, how strictly local governments enforce the new rules (and any penalties for officials who don’t curb prices), developments from China’s annual parliamentary meeting and leadership transition that set policy direction, and movements in the Shanghai Composite and Hang Seng indexes and major property developers such as Vanke and Poly Real Estate.
Call 1300 880 160
Start a chat
Schedule a call
