China may restrict foreign property
funds By Sally W L Wang
SHENZHEN - The Chinese government is
mulling a new regulation to restrict foreign
capital from pouring into the country's
real-estate market, in fear that the influx of
overseas funds could further inflate the property
bubble.
The regulation under consideration
is part of Beijing's renewed efforts to cool down
what it sees as an overheating property market.
The State Administration of Foreign Exchange
(SAFE) is said to be responsible for the drafting
of the new regulations, which are likely to be
issued soon. However, no details have been
revealed so far.
SAFE has been monitoring
the inflow of foreign funds in the property market
with growing concern. In a report on China's
international income and payments in 2005, SAFE
said the influx
of
foreign money in real estate should be viewed as a
matter concerning China's "economic and financial
security".
According to the report,
overseas institutions spent a total of US$3.4
billion on buying housing in China in 2005,
accounting for 15% of total investment in the
property market last year. And it acknowledged
that the real figure could be much bigger, as many
foreign funds had not been taken into account
because of the country's defective statistical
system.
Foreign money has continued to
pour in this year. According to statistics from
the Ministry of Commerce, overseas funds put into
China's real-estate sector in the first quarter of
2006 alone reached $1.48 billion, which accounted
for more than half of total foreign investment in
China's service and trade sector during the
period. The sum was nearly half of the total
foreign capital invested in China's property
market for all of last year.
Market
analysts have pointed out that foreign capital
began to flow into China's property market in
2004. The China Real Estate Finance Report put out
that year by the central People's Bank of China
(PBoC) said foreign funds accounted for 23.2% of
total investment in Shanghai's real-estate sector
in the fourth quarter of 2004, compared with the
8.3% in the first quarter of 2003.
The
PBoC also pointed out that overseas funds in the
real-estate market in Shanghai totaled more
than 22.2 billion yuan ($2.7 billion) in the first
11 months of 2004. Of the total, 15 billion yuan
was in property development, accounting for 13% of
the whole business. The rest, nearly 7 billion
yuan, was spent on housing purchases.
Riding on housing-price hikes and
anticipating the yuan's revaluation, overseas
funds have been flowing into property markets in
major Chinese cities such as Shanghai and Beijing through various
channels, PBoC said. Statistics show foreign funds
mainly focus on buying villas, luxurious
apartments and high-quality commercial and office
buildings. Last year, for instance, in Shenzhen
alone, about 12,200 housing units were purchased
by Hongkongers in 2005.
Officials with the
SAFE said earlier that they were increasingly
concerned with the growing overseas investment in
housing and other industries, and were studying
possible countermeasures. Although it remains
unclear to what extent foreign investment has
affected housing prices in China, especially in
big cities such as Beijing and Shanghai, calls for
the government to take action to curb speculation
have been on the rise.
Various reasons
facilitated the scramble for Chinese property. The
acceleration of urbanization and subsequently
swelling demand of housing in recent years have
made the property market a hot economic sector.
The emergence of a number of large, financially
sound developers in recent years have marked the
maturation of China's property market.
Foreign investors "not only eye [Chinese
people's] purchasing power in the property market,
but also the high-speed development of [the]
Chinese economy", said Zhong Bin, editor-in-chief
of China Property magazine. Four major purchases
alone by foreign investors - the Macquarie Group
from Australia, Goldman Sachs Group, and Morgan
Stanley Group - totaled $450 million in Shanghai
last year.
Market insiders say that before
2004, foreign institutions involved in China's
property market were mainly Asian enterprises,
especially from Hong Kong. They made
profits through property-development projects.
From 2004, global real estate funds became
interested in the Chinese market. Their common
practice has been to buy already-built housing
projects, improving their quality and management
so as to increase rents and management fees. In
this way, they can make profits from their
investment and prepare for overseas listings of
the projects they have bought.
Take, for
example, the World Trade Tower in Shanghai,
purchased by Morgan Stanley Group. After
renovation and improvement of management, the
average rent of the building has risen 100% from
40 cents to 80 cents per square meter per day.
Sunchina Real Estate Fund Management Corp,
an international real-estate consultancy, said in
its report that the annual yield on investment in
Chinese real estate could reach between 30% and
50%. By comparison, returns in developed countries
would typically be less than 10%.
In
addition, the recent popularity of real-estate
investment trusts (REITs) in South Korea, Japan,
Singapore and Hong Kong gives foreign funds the
expectation that they can go public after
purchasing Chinese property and obtain huge
profits.
A widely expected revaluation of
the yuan also boosts the potential profitability
for foreign investment in China's property market,
because of the instantaneous profits that accrue
to holders of yuan-denominated assets, such as
property, when the currency increases in value.
However, at the current stage, foreign investors
are mainly looking forward to the increase of
housing prices and rents, as yuan revaluation is
considered to be a long-term process.
Financial analysts in China have pointed
out that housing speculation by overseas funds may
increase the risks for local financial
institutions, enterprises and residents alike.
Calls for the government to take measures to
restrict foreign funds from flowing into the
property market have become increasingly loud.
Zhang Yang, a researcher with the Chinese Academy
of Social Sciences, acknowledged that overseas
funds might have inflated the housing bubble, but
cautioned that their withdrawal could trigger a
market panic and burst the bubble.
Guo
Shuqing, the board chairman of China Construction
Bank, said the government needs to readjust its
policy concerning the entry and exit of foreign
funds with a focus on restricting the inflow of
short-term overseas investments in real estate.
And Xia Bin, director of the Institute of Finance
under the State Council's Development Research
Center, said China today is not short of capital,
so it is not harmful but imperative to restrict
the influx of foreign funds into the property
market.
Sally W L Wang is a
Chinese journalist based in Shenzhen.
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