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China: Tweaking the Rules for Property Foreign Investment

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The authorities in the People’s Republic of China (namely the central bank and the Ministry of Commerce embarked on another round of regulations for property investors in July, China Daily reports. The latest changes affect overseas borrowing for mainland China real estate projects with more exacting procedures for bringing foreign capital into the country for the purpose of incorporating a real estate concern. From the article it is not clear if this is the sum total of these property/foreign exchange controls. Inward investment by property investment companies with foreign shareholders that are already incorporated would be more difficult to control.

Writing in the South China Morning Post a week earlier, Cary Huang reported that the authorities are trying hard to stop ‘illegal’ funds flooding in and creating price pressures in the property and equity markets. Clearly there are plenty of investors who are betting that the yuan can only continue to rise against the dollar; that the Chinese currency is in the exact opposite position to that of sterling in the early nineties.

Ironically, foreign banks hoping to set up real estate joint ventures in China would seem to be one of the least of the problems of the Chinese authorities. A more pressing problem would seem to be foreign exchange coming into the country through the back door via already established Chinese/overseas (informal) networks. The recent rise in interest rates is not going to help the authorities in clamping down on that trade.

In the midst of the turmoil on the world markets last week the Shanghai stock exchange was alone in bucking the downwards trend and the authorities scored greater success reassuring investors than any of the ‘good and the wise’ in the West. The South China Morning Post also reported at the beginning of last week that the Xinhua news agency had published an upbeat statement on stock market conditions with the aim of keeping investor sentiment strong in the lead up to share flotations by PetroChina and the China Construction Bank. The latter already has a Hong Kon listing and Bank of America hold 8.5% of the stock. The bank is one of handful of mortgage lenders who have been tightening up on loans in Shanghai and its hinterland. Presumably, this move comes at the behest of the regulatory authorities rather than the initiative of the banks themselves.

The latest changes to the rules for foreign investment in property are in character with the piece-meal approach to regulation that we highlighted in our previous post (23rd June 2007). Asia Chief Executive of ING Real Estate, Robert Lie, was upbeat with the remark that ‘cooling measures won’t stay forever.’ Like rulers down the ages the Chinese government faces severe limits to its own power, not least because of the law of unintended consequences.

Interestingly, according to Grey Hyland of Jones Lang LaSalle, one intended consequence of the new controls may be to redirect foreign investment away from hotspots such as Shanghai and Shenzhen towards secondary Chinese cities. The Chinese government will also be concerned at the levels of speculation at the top end of the house market and the shortages of housing at the lower end of the market and may be keen to re-direct investment towards that sector.

Today, China Daily reported first half statistics showing that foreign property investments accounted for 24% of total foreign investment in the country. Although the National Bureau of Statistic’s percentages are somewhat confusing the picture of a steeply rising influx of foreign capital is clear enough. It is less clear, firstly,whether or not these figures are just investment coming through official channels or if (less likely) it includes unauthorised transactions and, secondly, the precise effect of these inflows on housing prices. House price inflation seems to be slightly lower than increases in the overall cost of living and in some areas, such as Shenzhen, serious house price falls are expected.