CHINA PROPERTY BEAT
Part 5: China wary of foreign 'speculators'
BEIJING - China's State Administration of Foreign Exchange (SAFE) has warned of large influx of foreign capital into the country's real estate market, promising to conduct a joint investigation on the problem and deal with any irregularities by working together with other administrative departments of the state.
In 2004, many overseas individuals bought houses in China, but not, in many cases, for the purpose of using the properties themselves. Rather, their purchases were clearly made in the expectation of realizing a capital gain on the property - ie, speculation. This large flow of speculative capital has exerted a substantial impact on China's real estate and property market, exacerbating the rapid rise in home prices. This situation has created a big risk for local financial institutions, enterprises and even residents, who stand to realize great losses if the resulting real estate bubble pops, and SAFE officials have expressed great concern over the speculation problem.
In some coastal cities, foreign buyers have purchased dozens or even more than 100 apartments, clearly suggesting speculative intent. The trend is especially pronounced in cities with rapidly rising housing prices, including coastal cities such as Shanghai. According to a survey research report issued by the Shanghai Branch of the People's Bank of China, China's central bank, foreign capital has flowed into several areas of the Shanghai real estate sector, which currently has almost no restrictions on remittances.
Comparing foreign exchange purchases of housing with yuan purchases, the proportion of foreign capital (including foreign exchange loans and inflow of foreign capital) jumped from 9.6% in 2003 to 16.8% in Shanghai in the first five months of 2004. The proportion of overseas funds directly flowing into real estate rose from 16.1% to 25.4% in 2001-2003, and further increased to 32.6% in the first five months of 2004. This mammoth market share of foreign funds in the Shanghai real estate market has exerted a strong influence on the market.
An official with a small foreign bank disclosed that although his bank has undertaken strict lending controls, there has still been a large amount of mortgage loans approved for people from overseas this year, averaging about 80 million yuan (US$9.7 million) each month. Compared with last year, the strong influx of foreign funds has not weakened but continued strongly in 2005. The bank's monthly issuance of mortgage loans increased by about 50 million yuan in the fourth quarter last year.
At present, the participation of foreign real estate investment funds in China takes basically four forms, namely, the direct purchase of houses; project cooperation; direct share purchases in real estate companies; and participation in company operations.
Direct housing purchases mainly target high- and medium-grade office buildings and residential houses. Project cooperation generally operates in the following manner: the foreign capital enterprise first selects a real estate project which it is interested in, then develops it in a cooperative way with a Chinese enterprise, and the foreign capital enterprise can make investment by direct investment or lending from shareholders.
For real estate development enterprises with foreign direct investment or cooperation, the portion of capital funds injected by foreign companies can be converted into yuan for investment, and overseas loans of foreign-invested enterprises can be converted into investment which shall not exceed the difference between the total investment and the registered capital. The profits of such foreign-invested real estate enterprises can be remitted abroad by following the procedures required for ordinary foreign-funded enterprises. As long as these enterprises can provide relevant documents such as financial auditing reports, tax certificates and decisions on dividends by the board of directors, they can remit their profits abroad after examination and approval by the SAFE. This policy has made China's real estate sector quite open to transnational capital.
At the same time, China has almost no restrictions on foreign-funded enterprises engaging in real estate development with respect to registration in industrial and commercial administrative departments. The right to examine and approve foreign capital enterprises investing in real estate has been handed to local commissions of foreign economic relations and trade, and after these approvals, foreign-funded enterprises obtain registration in the industrial and commercial administration departments.
The different standards on foreign exchange controls for Chinese and foreign banks have also sped up the separation of foreign exchange business between Chinese and foreign banks. Taking personal mortgage loans as an example, Chinese banks must register each foreign exchange loan transaction in foreign exchange administration departments, and go through verification and cancellation procedures after each monthly installment payment of the mortgage loans. The procedures for foreign banks are much simpler, by contrast; they do not need to go through the registration, verification and cancellation steps.
According to statistics of the Shanghai Municipal Banking Regulatory Bureau, the foreign exchange loans of Chinese financial institutions dropped significantly in Shanghai in 2004. The outstanding sum of various types of foreign exchange loans issued by Chinese financial institutions in Shanghai reached $13.2 billion by the end of 2004, an increase of $1.43 billion over the beginning of the year, but $2.87 billion less than the same period of the previous year. Of this, short-term loans increased $500 million as compared with the early of the year, and long- and middle-term loans increased by $1.28 billion. At the same time, foreign exchange loans issued by foreign financial institutions hit a new high in recent years.
The outstanding foreign exchange loans issued by foreign financial institutions in Shanghai reached $12.5 billion by the end of 2004, an increase of $4.47 billion over the early half of the year, and a surge of $2.89 billion year on year. Some $1.5 billion of this increase was recorded in the second half of last year, accounting for 33.6% of the total increase in foreign exchange loans for the entire year.
According to experts, the high growth of foreign exchange business of foreign banks recently is mainly the result of an increase in loans issued to the real estate sector. This trend is expected to continue into 2005. However, the phenomenon has aroused great concern within relevant government departments in China. SAFE has recently carried out research on speculative behavior by institutions and individuals with respect to housing purchases, and SAFE officials disclosed that based on the results of this research, it will soon readjust policies concerning foreign exchange controls with the intention of restricting speculative purchase of housing.
(Asia Pulse/XIC)
Part 1: Regulation needed (May 16, '05)
Part 2: 'Cool' not a good thing in Beijing (May 17, '05)
Part 3: Foreign money floods Shanghai (May 18, '05)
CHINA PROPERTY BEAT
Part 4: Hong Kong houses go through the roof
By Yohji Yuan
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CHINA PROPERTY BEAT
PART 3: Foreign money floods Shanghai
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CHINA PROPERTY BEAT
Part 2: 'Cool' not a good thing in Beijing
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CHINA PROPERTY BEAT
PART 1: Regulation needed
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