SHARE values fell the most in nearly 19 months in Shanghai yesterday, dragged down by developers after the central government tightened controls on the property market.
The Shanghai Composite Index lost 3.65 percent, the biggest daily loss since August 8, 2011, settling at a near two-month low of 2,273.40 points. The Shenzhen Composite Index fell 5.29 percent to 9,139.75 points.
China is to levy a 20 percent income tax on profits from the sale of existing homes, the State Council announced last Friday. The central government also ordered local banks in cities where prices are rising too fast to raise minimum deposits and mortgage rates for purchases of second homes.
The central government also reiterated its intention to expand property tax trials and required local governments to set price-control targets on new homes.
"It was earlier and tougher than observers expected in terms of concrete mortgage and home-purchase rules," RBS Research said yesterday.
A Shenyin & Wanguo Securities report said the "tougher wording" in the State Council's announcement indicated "the beginning of a new tightening circle on the real-estate market." The broker expected more measures to be unveiled in the coming months.
Property developers tumbled. A gauge tracking the performance of listed developers fell by 7.6 percent. Poly Real Estate, China's second largest developer, slumped by the daily limit of 10 percent to 11.37 yuan. Gemdale Corporation also slid 10 percent to 6.42 yuan.
However, analysts said the enforcement of a sales tax was not likely to slow rising home prices while it posed a risk to China's economic growth.
"We think the immediate impact is going to be a surge in home sales in big cities as people rush to close deals before the policy is put into place," research analysts at Societe Generale said. "Afterwards, property sales will probably drop substantially but property prices may not, because tighter implementation of the capital gains tax will serve to reduce the housing supply."
They added: "Slower home sales are very likely to dent the growth momentum and overall liquidity conditions as suggested by the housing downturn in early 2012."
Market sentiment also declined on data released over the weekend showing the services sector grew at its slowest pace in five months in February, fueling concern about the pace of recovery.
The index measuring business activity in non-manufacturing sectors fell in February to 54.5 from 56.2 in January, the China Federation of Logistics and Purchasing reported on Sunday, but still above the reading of 50 that separates expansion from contraction.
Cement producers also lost on concerns that demand for the building material will dwindle.
Anhui Conch Cement Co, China's biggest cement producer, fell 10 percent to 17.88 yuan yesterday. Gansu Qilianshan Cement Group Co fell 10 percent to 10.20 yuan. Shaanxi Qinling Cement (Group) Co saw its shares down 10 percent to 6.20 yuan.