How China's Stricter Real Estate Regulations Can Affect U.S. Stocks

Michael Teague  |

China’s State Council recently announced decision to impose tighter regulations on property developers and home-buyers in an attempt to get ahead of rapidly rising costs and fears of an eventual housing bubble reverberated through the global equities market.

The measures will affect those on either side of the home-buying transaction: buyers of second homes will have to contend with higher down-payments and mortgage rates in cities that have seen rapidly increasing property prices, while sales of existing homes will be subject to a 20 percent capital gains tax.  China’s housing boom has been one of the major features of global economic growth over the past decade, particularly the enormous amount of raw materials required by all the building that has taken place so far.

After the initial shock, U.S. markets seemed mostly unphased by the news, with the Dow closing about 0.3 percent to 14,127.82 points--its second highest close ever--while the S&P 500 closed at 1,525.20, just 2.6 percent lower than its best close ever (on October 9, 2007).

Monday’s market reaction could also be an indication of what U.S.-based companies could be most affected by the move. Caterpillar, Inc. (CAT), lost just over 1.75 percent to close at $89.75 per share, while the U.S. Steel Corp (X) closed down 1.38 percent to end the day at $20.03 per share, and the British industrial metals and minerals company Rio Tinto plc (RIO) fell 2.45 percent to close at $50.48 per share. The iShares S&P Global Materials index (MXI) ended the day having lost slightly more than 1 percent, closing at $60.00. The Energy Select Sector SPDR (XLE), Industrial Select Sector SPDR (XLI), and Materials Select Sector SPDR (XLB) all pared losses later in the day to close mostly flat.

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The news resulted in across the board drops in Chinese Exchange Traded Funds: Market Vectors China (PEK) lost 3.41 percent to $35.40, Guggenheim China Real Estate (TAO) lost 3.15 percent to $22.14, Global X China Financials (CHIX) was down 3.08 percent to $12.90, EGShares China Infrastructure (CHXX) was down 2.19 percent to $18.27, and Global X China Materials (CHIM) was 3.70 percent to $8.60 by Monday’s closing bell.

China’s Shanghai Composite Index dropped 3.70 percent, its most significant loss since August of 2011, with ripple effects being felt throughout Asian markets in Australia, Hong Kong, and South Korea among others where similar, if not as severe, declines have also been felt.

The move on the part of the Chinese government comes as the country’s leadership is undergoing its mandatory 10-year change with Vice-President Xi Jinping officially assuming the reins of power from his predecessor, President Hu Jintao.

While there is considerable anxiety as to what the move will mean for global economic growth, not to mention the scare it has caused in Asian markets, not everyone is pessimistic.  Scott Wren, senior equity strategist with Wells Fargo Advisers, noted that it was far more preferable for China to try “to curb speculation” before a bubble can acquire the momentum necessary to inflate itself to catastrophic levels.

Jia Kang, Head of the Chinese Ministry of Finance’s Institute of Fiscal Science sought to frame the new measures in a similar, non-threatening way, when he was quoted as saying: "Considering the positive and negative effects of this policy I could see that this isn't a permanent measure…”

Still, the possibility of consequences for global oil, for instance, could be particularly critical. China is the world’s second largest economy and if it slows down its oil purchases, the effects will be noticeable, especially in a market where demand is already relatively lagging behind supply.

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