China Stocks Drop on Property Curbs Speculation, Europe Debts

China's stocks fell for the first time in three days on speculation the government will step up measures to avert asset bubbles even as Europe's debt crisis threatens to halt the global recovery.

Poly Real Estate Group Co. paced declines by developers after the Economic Observer said Shanghai will start a property tax trial next month. PetroChina Co., the nation's biggest oil company, lost 2.3 percent and Jiangxi Copper Co. dropped 1.6 percent as raw-material prices fell amid concerns over the health of European finances.

"The market is still worried about the introduction of additional harsh measures such as the property tax, which would likely lead to a 20 percent and 30 percent decline in housing prices," said Zheng Tuo, president of Shanghai Good Hope Equity Investment Management Co. "That would exacerbate the risk of a double-dip for the economy."

The Shanghai Composite Index retreated 50.79, or 1.9 percent, to close at 2,622.63. The CSI 300 Index declined 2.1 percent to 2,813.94. China's stocks joined a rout across Asia after a report that North Korean leader Kim Jong Il ordered his military to prepare for combat last week.

Shanghai will introduce a property tax policy on a trial basis next month, the Economic Observer reported, citing an unidentified person.

The report didn't identify the nature of the tax and said more detailed policies may be announced at a later date. The 21st Century Business Herald reported on May 14 the prospect of expanding a tax on commercial-use properties to residences.

Housing Prices

"The government is determined to bring down housing prices," said Wei Wei, an analyst at West China Securities Co. in Shanghai.

Poly Real Estate, the second-largest listed developer, lost 4 percent to 11.66 yuan. China Vanke Co., the biggest, dropped 3.9 percent to 7.40 yuan. Gemdale Corp., the fourth largest, retreated 1.6 percent to 6.98 yuan.

The Shanghai Composite has lost 20 percent this year on tightening measures that include reining in loans for purchases of multiple homes, increasing mortgage rates and raising down payment requirements. The central bank ordered lenders this month to set aside more deposits as reserves for a third time in 2010.

China's domestic fund managers cut stock holdings in their portfolios by four percentage points in the past two weeks, according to a report by Macquarie Securities Ltd. analysts Shirley Zhao and Michael Kurtz.

Borrowing Costs

Stocks made up 74 percent of China's 350 open-ended A-share funds, with the rest in bonds, cash and money market instruments, the report said, citing data from Shanghai Wind Information Co.

China's central bank will remain "particularly cautious" about raising interest rates because of debt incurred by local governments and the potential for bad loans at the nation's banks, Liu Yuhui, an economist with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, wrote in the China Daily.

Stocks fell across Asia today, with the MSCI Asia Pacific Index tumbling to the lowest in 10 months, after the North Korea Intellectuals Solidarity group said on its web site that the country's military was put on alert following the March 26 torpedoing of a warship.

Concerns that European finances are worsening dragged commodity producers lower. PetroChina fell 2.3 percent to 10.85 yuan. China Petroleum & Chemical Corp., the second-largest oil producer, dropped 2.8 percent to 8.82 yuan. Jiangxi Copper, China's biggest producer of the metal, retreated 1.6 percent to 29.29 yuan.

Spanish Banks

Three-month delivery copper on the London Metal Exchange dropped for the first time in four days, losing 2.4 percent to $6,742 a metric ton today. Crude oil declined, falling below $70 a barrel in New York.

The International Monetary Fund urged Spain to take more steps to overhaul ailing banks as the nation's financial sector "remains under pressure."

Europe is China's biggest export destination, making up 20 percent of its total overseas sales.

A slowdown in Europe's economy will "badly hurt" Chinese exports, limiting China's ability to allow its currency to appreciate against the dollar, Pride Investment Group Ltd.'s Lewis Wan said in a Bloomberg Television interview today.

Chinese stocks are factoring in both accelerating inflation and declining growth, a "mispricing" that is poised to "correct soon," Morgan Stanley said.

Huludao Zinc

The brokerage upgraded steel and building materials shares in its China portfolio to "overweight" from "underweight," a week after increasing the weighting of banks, analysts led by Jerry Lou wrote in a report.

Huludao Zinc Industry Co., China's second-largest zinc producer, surged by the 10 percent daily limit for a second day, gaining 6.56 yuan. The Shenzhen Stock Exchange scrapped the "special treatment" designation for Huludao Zinc after the company returned to profit last year, according to a company statement.

The stock was suspended on May 21. "Special treatment" is the designation for Chinese listed companies with two consecutive years of losses limiting daily trading change to 5 percent.