Due to China’s latest moves to rein in property prices， the mainland stock exchange on March 4 saw plunges of stock prices in sectors like real estate， building materials， cement， coal and steel. Without a doubt， the real estate sector still plays a predominant role in China’s economy and investment market.

When people expected prices for new commercial housing and renting to be boosted by the 20-percent personal capital gains tax levied on second-hand home sales， the stock market responded in the opposite.

The new policies prescribed that tax and housing authorities should cooperate closely to levy personal capital gains tax on home sales. If original values can be verified by historical information on tax collection and housing registration， personal capital gains tax should be levied at 20 percent of the transaction income.

In most cases， a capital gains tax was slapped on real estate， stocks， bonds， precious metals and artwork.

In the United States， sellers will pass on the tax to purchasers and get anticipated returns in a bull market. In a bear market， sellers have to face reduced returns or even a loss.

The rigid demands of the real estate market are mainly dependent on economic development and the population， while the prosperity of the property investment market is primarily decided by the amount of money and investment income available. In some sense， a capital gains tax will increase the uncertainties for investment. Now， people who intend to invest in the property market have to take potential risks deriving from the 20-percent tax into consideration. If buyers are reluctant to shoulder the tax， or investment income can’t cover all the transaction costs， investors would think twice before making a decision.

There is no theoretical and realistic foundation for the saying that the tax will push up the property market. With the 20-percent capital gains tax levy， people will undoubtedly turn to the new housing market to avoid unnecessary expenses. On the other side， investors will take a wait-and-see attitude. If there is a surge in currency issuance and the inflation rate， they will throw themselves into the property market without hesitation； if money supply is tightened and inflation is under control， they will look elsewhere.

Dongguan is a case in point. When the 20-percent personal capital gains tax was first levied in 2007， second-hand housing transactions encountered a downturn， but later experienced a quick recovery. In 2009， the loose monetary policy， which was targeted at fighting against the global financial crisis， managed to eliminate all the negative impact of the real estate regulations.

With the 20-percent personal capital gains tax， how will markets around China respond？

As more and more people settle down in first-tier cities， buyers will go ahead with their home purchasing plan. By the end of 2012， more than 80 percent of housing loans went to first-time homebuyers， indicating that rigid demand is a major drive behind the real estate market. The same is true in Beijing and Shenzhen. Since bubbles have burst in thirdand fourth-tier cities， the use of the new tax is limited. In contrast， second- and third-tier cities， which want to match first-tier cities in property transactions， will descend into fierce competition for capital and consumers.

Escape clauses should be put in place in the implementation of the personal capital gains tax. For instance， people who only own one home and have kept it for over five years should be exempted from the 20-percent tax when they sell it to buy a bigger one. For people who own more than three homes or sell their homes within a year after buying them， a differentiated tax rate system ranging from 10 to 45 percent should be implemented.

This way the capital gains tax can effectively regulate capital income and avoid harming innocent home purchasers.