New taxes take the shine off Chinese real estate -- shares plummet in HK and Shanghai

In Asia Tuesday, shares closed lower. The Shanghai Composite Index lost 0.9%, closing at 3,274 and in Hong Kong, the Hang Seng Index was down 1.3% at 21,814. Japan's Nikkei 225 Index shed 0.2%, ending the day at 10,083.

In China, declines were led by property developers as investors reacted to the government's reinstatement of property taxes for homes sold within 5 years of purchase. Prices for residential homes in China's 70 largest cities spiked 5.7% in November alone, and fears of a bubble are seeming more and more likely to be realized. "We have modest real estate bubbles that are emerging, but they are really at a very early stage," Prasenjit K. Basu, Chief Economist at Daiwa, said on CNBC this morning. But some say the tax of 5.5% will not dampen consumer enthusiasm.

Gu Yuchang, the Deputy Director of China Research Real Estate Research Association, told CCTV, "The tax policy will not curb the real home purchase demand and will not clamp down on the property market. It intends to discourage flipping of apartments by speculators." The government is continuing many incentives including smaller down payments and lower mortgage rates for first time buyers, hoping to sustain the amazing growth in the region.

The tax will target large luxury homes, according to reports, and at the same time, the government says it plans to speed up construction of low-cost housing. China Vanke (CVKEF), China's largest developer of residential homes, fell 2.5% and Poly Real Estate dropped 2.9%. Luxury home specialist Gemdale slumped 5.1%.

The panic spread to Hong Kong, where shares in developers with interests in mainland China also fell. Greentown China Holdings (GTWCF), builder of Western-style villas, nose-dived 6.6%, China Overseas Land (CAOVF) plunged 5.9 and Shimao Property (SIOPF) plunged 5.5%. Country Garden Holdings (CTRYY), which is controlled by China's richest woman, lost 4.8% and Hang Seng newcomer and developer of swanky luxury properties Evergrande Real Estate sank 3%.

In Tokyo, shipping companies dragged the Nikkei index lower as Mitsui O.S.K. Lines (MSLOF) added a sixth day of losses falling 1.5% today and Nippon Yusen K.K. (NYUKF) lost 1.9%.

Japanese real estate companies were on the rise today on news that property investor Secured Capital Japan plans to purchase a major building next to Tokyo Station. Secured Capital (SCJAF) surged 11.6%, bolstering confidence in other property companies. Sumitomo Realty & Development (SURDF) leaped 4.6% and Mitsubishi Estate rose 2.9%. A reversal today of China's seemingly unstoppable upward trend, and Japan's worrying losses.


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