Stopping the Flood

By LIU XINLIAN

Stopping the Flood

By LIU XINLIAN

LAI JIANQIANG

China looks to alleviate pressure from inflows of international hot money by enhancing restrictions on the housing market

On January 5, a consortium composed of Hong Kong-listed Kerry Properties Ltd., Shangri-La Asia Ltd. and Singapore-listed Wilmar International Ltd. announced their success in winning bids for land parcels worth 1.36 billion yuan ($206 million) in Yingkou, northeast China’s Liaoning Province. The three companies plan to set up one or more joint ventures to develop the project site with a total investment of up to 7.5 billion yuan ($1.14 billion).

This conglomerate was not alone in its march into China’s housing market. GTC, the biggest real estate enterprise in central and eastern Europe, recently announced that one of its comprehensive commercial complexes was completed in Chengdu, capital of southwest China’s Sichuan Province. As for the Chinese market, the foreign company is preparing to invest as much as 5 billion euros ($6.8 billion) in the following several years.

Against the backdrop of the global fnancial crisis, the Chinese market faces much smaller risks than other countries, said GTC Chairman Alon Shlank.

Last year, housing prices in 70 large and medium-sized cities experienced year-onyear growth of more than 10 percent between February and July. Although it started to slow in May due to tough government measures, prices in December still grew 6.4 percent year on year and 0.3 percent month on month, according to the National Bureau of Statistics.

Facing China’s sizzling housing market, foreign funds cannot afford to stand on the sidelines. According to the Ministry of Commerce (MOFCOM), 972 foreign-funded real estate companies completed registration from January to November last year, a yearon-year increase of 18.7 percent. The number reached 1,100 for the whole of 2010.

The property sector absorbed $20.1 billion in foreign direct investment (FDI) from January to November 2010, jumping 48 percent year on year, compared to a 17.73-percent growth in the total FDI in the same period, according to MOFCOM data.

Since the end of 2009, foreign investments have been roaring back to China’s real estate markets, said a report by DTZ, a global leading real estate advisor. Those capital infows have watered down China’s efforts to cool the property fever, it said.

Caught in the predicament of housing market regulation, the Chinese Government has to guard against foreign capital infows that might complicate China’s policy to fght housing speculation.

Profit in China

Foreign property investment w as lackluster in 2009, but changes occurred throughout 2010, said Liu Deyang, China Executive Director Chairman of the London-listed Savills, a leading global real estate service provider.

“In the post-crisis era, fnancing became much more difficult for foreign-funded institutions. In the United States, many investment banks stopped lending. Because of this, foreign investors are looking for investment destinations with low risks and high returns,” said Liu.

China was their best choice owing to its rapid economic growth, which outshines European countries, caught in the midst of a debt crisis, and the United States, with its high unemployment rate, said Liu.

Yang Hongxu, a researcher with the Shanghai-based E-house China Research and Development Institute, attributed the foreign investment surge in properties to expectations that the yuan will appreciate.

Even if the housing prices stay stable, the foreign-funded property companies could make a proft as a result of the yuan appreciation, not to mention that China’s housing prices have surged in recent years, said Yang.

The Chinese yuan appreciated to a record high against the U.S. dollar on January 25 to reach 6.5881 yuan per dollar, according to the China Foreign Exchange Trading System. The yuan has appreciated about 3.5 percent since the yuan exchange rate reform restarted in June 2010.

“The yuan exchange rate will keep climbing; its appreciation is both a short- and longterm trend,” said Li Jian, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the MOFCOM.

The China International Capital Corp. (CICC) predicts that the yuan will appreciate by 5 percent in 2011, and its exchange rate against the dollar will reach 6.34 by the end of 2011.

The yuan appreciating trend will set off a new housing investment rush for foreign capital, said Yang.

The DTZ report also said foreign investors rushed to set up property funds using the yuan in China, expecting to cash in on China’s economic boom, appreciation of the yuan and a high level of earnings visibility in the red-hot housing markets. DTZ predicted more than 80 percent of foreign funds will set up yuan funds in China, and most of their capital is expected to pile into the property sector.

Curbing speculation

The National Development and Reform Commission (NDRC), in a recent report, said much of the foreign capital entered China in legal forms, such as foreign direct investment, overseas fnancing of Chinese property companies or foreign private equity funds.

But some sneaked in through hidden channels as speculative hot money, said the NDRC.

Qiu Baoxing, Vice Minister of Housing and Urban-Rural Development, also said one of the major diffculties of the housing sector regulation is limited investment channels for private capital amid the inflow of international hot money and expectation of the yuan appreciation.

Jing Naiquan, an associate finance professor at Zhejiang University, said the current surge in foreign property investment is different from 2004 and 2007. Foreign investors have moved beyond simple fnancial investments and extended their reach to upstream sectors like construction materials, building and design, he said.

GUO CHENG

The new trend may be more powerful in pushing up house prices of China, said Jing.

On November 16, 2010 a joint statement was released by the Ministry of Housing and Urban-Rural Development (MOHURD) and the State Administration of Foreign Exchange (SAFE) saying that foreign companies can only purchase commercial property that they plan to use themselves and foreign individuals can only buy one residential unit per person for self-use.

It demonstrated China’s effort to curb the infows of speculative money into the domestic housing market, said Credit Suisse analyst Du Jinsong.

Several days later, MOFCOM on November 22, 2010 released a statement of its intention to tighten regulations on foreign investments in the property sector.

MOFCOM urged local authorities to strengthen checks and supervision on property investment that involved foreign investors and strengthen risk controls on the sector.

Foreign-funded developers were not allowed to make profits by buying and reselling real estate projects, which will be strictly monitored by MOFCOM along with MOHURD and SAFE.

Multiple measures should be taken to curb speculation in China’s housing market, said Jing. China should complete its information and warning systems in the property market. China should also make efforts to steer foreign capital to venture capital investment to foster the hi-tech industries, said Jing.