By Carlos Guillen
After making a nice finish to last Friday's trading session, stocks are having an overall down day today mainly as news out of China is serving to weigh on investors' sentiment.
Clearly, today's market action has been mostly affected by news that China will put the brakes on growth, and this sent China's Shanghai Composite down 3.7%, the biggest one-day percentage slide since August 2011. Of course, this news has had a contagion effect here at home, sending the Dow Jones Industrial Average down over 40 points. One of the fears investors have had for some time is that China's economy was expanding too fast, and indeed, now the Chinese government is putting measures to curb rising home prices amid signs the market is heating up. The new rules include higher down payments and mortgage rates on second homes in some cities, as well as a capital-gains tax on existing homes. More specifically, the Chinese government will be imposing a 20 percent tax on capital-gains of homes. New home prices in China's 100 largest cities have been expanding for the last nine months; more on this below.
Clearly, investors around the world have been somewhat spooked by China's new direction to cool its economy, but investors are also looking at Europe and do not like what they see. Euro-zone finance ministers met today to consider whether the bloc's struggling economies should be given more time to cut their government budget deficits and avoid a new round of austerity that could push the 17-nation economy deeper into recession. However, there was nothing concrete as no final decisions were made.
With very little in terms of macro-economic data out today, markets will continue to see volatility on any bit of news or rumors that pop up, and that includes any bits on the so called "sequester."
China Gets Tough on Real Estate
By David Urani
As you probably know, Chinese home prices really spiked in the middle of last decade (can you believe the 2000's are already a previous decade?), especially in 2007 and 2008. It's quite clear to many, including the government, that property values rose too much too quickly and subsequently the Chinese government has made several attempts to crack down on prices. While those efforts have largely kept prices from rising a whole lot more, Chinese officials have still generally failed to actually push prices downward as they would like. In fact, in January new home prices were up 0.8% from a year ago.
Today the government announced some aggressive new moves, the biggest being enforcement of a 20% tax on property sale capital gains. They are also pushing for stronger restrictions on buyers and higher interest rates for second homes. Consequentially, an index of property-related stocks fell by 9.3%, while the Shanghai Composite was off 3.7%. This has also been a major source of the selling in the US markets today.
Usually when the Chinese government says they want to do something, they go and make it happen by force so it's fair for investors to believe that Chinese home prices will fall. And of course there's the fear that will spread to the consumer markets. That being said, I'm inclined to believe the Chinese consumer is on a strong enough path of growth that lower property prices aren't the kind of thing that will derail them, although it could slow their acceleration to an extent. And one does have to wonder what would happen if property prices were left to rise unchecked.