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In China, stocks drop on real estate concerns

April 19, 2010 | 10:30 am

How important is real estate to China’s economic growth? If the Shanghai Stock Exchange’s performance Monday is any indication, the answer is “a lot.”

The country’s stock market took its biggest plunge in eight months after China’s State Council announced over the weekend it would crackdown on speculators.

The benchmark Shanghai Composite Index fell 4.79% to 2,980.30 points. Property shares were the biggest losers, dropping 8%.

The Chinese cabinet said Saturday that commercial banks should restrict lending to buyers of third homes in markets with runaway property prices. Buyers also must prove they have lived in the city in which they hope to buy a home by showing tax or social insurance records.

The new regulations come days after the central government raised the minimum down payment for second homes from 40% to 50%.

Lawmakers are increasingly concerned that exorbitant property prices are stirring populist rage. Property developers, local governments and wealthy investors have been cast at villains in an industry that underscores the gulf between rich and poor.

The stricter rules also represent an attempt to control leverage in China’s banking system in the event that property prices begin to reverse course.

Real estate growth has become a driving force behind China’s rapid economic recovery. Cities can chalk up developments toward their growth targets. Tertiary industries such as cement, steel and construction provide jobs. An estimated 50% of local government revenue is provided by land sales.

-- David Pierson, in Beijing