Shares in property developers slumped as Beijing tries to stop another housing bubble, writes David Barboza.
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".
Average property price rise in Shanghai in the first two months of the year
Capital gains tax on housing imposed by China's State Council