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Tax reduction on property sales in China hailed as significant

Sale profits, rather than prices, will be taxed, the State Council announced yesterday and the tax will apply to properties sold two years after purchase rather than the present five years.

Although the state department did not say when the new tax regime will start it has been hailed as significant by analysts. It is regarded as a positive move to prevent the world's fourth-biggest economy sliding into the deepest slowdown since 1990.

'These measures are much more significant than those announced in the past few months and along with interest-rate cuts, are likely to stabilize the property market,' said Peng Wensheng, head of China research at Barclays Capital in Hong Kong.

Real estate is regarded as a vital part of the Chinese economy. Falling home sales are undermining construction and domestic consumption just as export demand collapses because of recessions in the US, Europe and Japan. Building is the biggest driver for China's expansion, contributing a quarter of fixed-asset investment and employing 77 million people.

China's economy is now expected to grow as little as 5.5% next year, the weakest pace since 1990. 'That is less than the 8% needed to create jobs and maintain social stability,' according to Liu Mingkang, chairman of the China Banking Regulatory Commission.

The government is also going to expand preferential lending rates for second-home buyers and it called for more lending for low-cost housing projects and support for mergers and acquisitions by developers. Previous measures this year have included trimming costs including mortgage rates, taxes and down-payments, for first time buyers. And last month the government cut interest rates by the most in 11 years and announced a $584 billion economic stimulus package running through to 2010.

'This will give the market a short-term boost. Raising sales volumes even in the short term could help developers stay afloat and help stabilize the property market,' said Ken Peng, an economist with Citigroup in Shanghai, but not everyone is optimistic.

'These measures are unlikely to boost sales a lot. Home prices are still beyond the affordability of the general public,' said Xing Ziqiang, an economist at China International Capital in Beijing.

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