Shares of Chinese property developers plunged yesterday in reaction to a government announcement that it would begin collecting land appreciation tax from next month.

Shares of Vanke, the country's largest property developer, dropped 10 percent to 17.28 yuan ($2.21); and Poly Real Estate, the nation's biggest State-owned developer, slid nearly 10 percent to 52.03 yuan ($6.67).

The Shanghai Stock Exchange Composite Index closed at 2,778.90 points, down 42.12 points.

On the Hong Kong stock market, shares in Shanghai-based Shui On Land Ltd and China Overseas Land both slid 5.8 percent, Shimao Property lost 5 percent, and Greentown China dropped 7.14 percent.

"The tax changes will narrow the profit margins of developers," said Charles Zhang, an analyst from Colliers International Property Services (Shanghai) Co Ltd.

In a bid to prevent property developers profiteering from hoarded land, the government will switch to using market valuations of land to determine capital gains taxes for building projects. The tax rate ranges from 30 to 60 percent.

The State Administration of Taxation (SAT) issued a notice on its website on Tuesday, telling developers to settle their land appreciation tax starting from February 1.

The tax was first introduced in 1993, but it has never been officially collected; and is seen as yet another measure to control the overheated property market.

Booming housing prices have made many developers hoard large pieces of land and drag their feet in project development, in the hope of making larger profits from appreciation of land prices.

The practice, in turn, has led to housing prices skyrocketing in major cities.

According to a report released recently by the website Sina.com and New Real Estate Magazine, real estate prices in Beijing have increased by 42 percent over the past three years. The average housing prices in 70 major Chinese cities climbed 5.2 percent in November year on year.

"The tax signals the government's resolve to regulate the property market," said Zhang Qi, a researcher with the Institute of Economic and Resources Management affiliated to Beijing Norman University.

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