November 30, 2010, 6:25 AM EST

By Bloomberg News

Nov. 30 (Bloomberg) — China will expand a capital gains tax of 20 percent on the sale or transfer of restricted stock, according to the Ministry of Finance.

Holders of so-called lock-up shares through mergers or inheritance will be required to pay the tax on each transaction, the ministry said in a statement on its website today. The ministry previously only required investors to pay the tax if they sold restricted stock acquired through a state-owned company’s transition to a publicly listed company.

China’s stocks fell today, dragging the benchmark index to its first monthly drop since June, as speculation the government will raise interest rates and the European debt crisis may spread threatened the economic outlook.

Chinese stocks have also fallen this month on concern that executives and investors who held shares in the companies before their initial public offerings will flood the market with equity as lockup restrictions expire. About 33 billion yuan ($4.9 billion) of stocks on ChiNext, China’s main market for start-ups, became tradable on Nov. 1, equal to a quarter of the total outstanding stock on the board, according to Liu Xiangning, an analyst at Huatai Securities Co.

–Irene Shen. With assistance from Eva Woo. Editors: Allen Wan, Darren Boey

To contact Bloomberg News staff for this story: Irene Shen in Shanghai at ishen4@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net