VI-11 Question: In July 2006, six of the Chinese Government departments jointly issued a notice restricting foreign investment in the real estate market in China. Why is that? What are the new regulations concerning foreign investment and individuals entering the property market or buying apartments in China?
A: After China eliminated different treatments of domestic and foreign property traders in 2002, the Chinese property market became more and more attractive for foreign investors. Statistics show that from 2002 to 2004, foreign capital accounted for about 20 percent of all property purchases in China. In the first half of 2006, the total foreign investment in the Chinese real estate market accounted for 70 percent of foreign investment in propertyfor the whole of 2005, or about US$3.5 billion.
The continuous and substantial inflow of foreign investment into the Chinese property market helped push up the prices of property assets, adding more pressure to the renminbi appreciation, further imbalancing international payments, and increasing the potential risks to domestic financial systems. The effect of financial policies aimed at rectifying property market behavior was greatly restricted due to rampant foreign investment.
Therefore, the Ministry of Construction, the Ministry of Commerce, the National Development and Reform Commission, the People's Bank of China, the State Administration of Industry and Commerce and the State Administration of Foreign Exchange jointly issued the Circular on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market. The restriction of foreign access into the domestic real estate market is not a creation of the Chinese Government. Of the187 International Monetary Fund members, over 130 have set up strict restrictions over foreign investment in the property market.
The Circular borrowed the common international practice and further standardized and improved relevant policies in the following three aspects.
First, foreign institutions and individuals must apply to set up foreign-invested companies if they are to buy properties not for their own use. After being approved by relevant government departments, they can start to operate relevant businesses.
Second, if a foreign-funded real estate enterprise fails to pay all the registered capital, has not acquired a Certificate for Using State-owned Land, or its development fund fall short of 35% of the total investment, it shall not borrow any domestic or foreign bank loans, nor shall the foreign exchange administrative department approve the conversion of foreign exchange loans into renminbi.
Third, institutions and individuals that meet the relevant provisions shall register their real-names for purchasing houses for self-use or self-accommodation. Only branches or representative offices of overseas institutions, or foreign individuals who have worked or studied in China for more than one year are qualified to purchase houses according to their actual needs for self-use.
These new policies show China's great concern over the large inflow of overseas capital into the domestic property market, and the government's determination to rectify the overheating property market.