Revised Guidelines on Foreign Investment in the real estate sector were released by the central government earlier this month. Qiu Ming writes in the Oriental Morning Post the effect is likely to be minimal, although luxury property transactions could take a hit

New revised guidelines on foreign investment in Chinese real estate are unlikely to have a significant effect on the sector. The new Guidelines on Foreign Investment, jointly issued last week by the National Development and Reform Commission and the Ministry of Commerce, made some amendments to the original 2004 version.

Taking effect on December 1, the new rules and regulations will restrict foreign capital being funneled into housing agents and brokerages and from flowing into the development of large-scale land lots and the construction and operation of high-end hotels, villas, office towers and exhibition and convention centers will also face restrictions

Given foreign capital accounted for just 4.4% of total investment in the real estate sector in Shanghai last year, the impact on the overall market is likely to be negligible. However, it is generally agreed that the further elaboration of the new policies, especially those concerning broking and agent businesses, would be needed to exert real influence over foreign investment.

Colliers International, a leading global real estate agency, argued in a report that the new guidelines contained few concrete changes from the original policy. “We think that the revised guidelines were issued against the backdrop of continuous RMB appreciation against the US dollar,” Colliers said. “Restrictions on foreign investment thus could help divert some of the foreign capital influx.”

The greenback was buying RMB7.42 on November 8, the weakest exchange rate since the currency was revalued by 2% in July 2005 after being pegged at 1:8.27 against the greenback for a decade.

“The revised guidelines also echo one of the themes of the 17th National Congress, a five-yearly gathering of the Communist Party of China,” Colliers wrote. “The theme is of restructuring development towards the quality of economic growth and away from the quantity, which was the priority when former president Jiang Zemin was in office. Therefore, the revised guidelines should be considered more as an overall correction to direct foreign investment at specific industries.”

However, analysts have noted a couple of aspects from the revised version that could have some effect on foreign investment, such as a stipulation that foreign capital flowing to housing agencies, broking houses and the property market in the second-tier cities will face harsher restrictions.

This implies the government is attempting to control the presence of foreign companies in property trading to limit property speculation and avoid the property price surges that have made housing unaffordable for urban dwellers, including those that are high earners.

This is, no doubt, favorable news for domestic property developers and signals the government’s effort to support infant domestic real estate agencies that are at risk of being out-competed by foreign rivals, especially in the second-hand property market. According to a survey by Shanghai-based Youwin, agencies either fully or partly supported by foreign funds have already snatched a major share of Shanghai’s second-hand property market.

Unfortunately for the sector, the restrictions on foreign capital might also discourage transactions in the luxury property market, where foreign-supported agencies are the most active.

Housing prices in mainland China’s 70 major cities rose 9.5% year-on-year in October, outpacing September’s 8.9% climb, according to figures released by the National Development and Reform Commission.

Shanghai’s average housing price grew 7.9% year-on-year in October, two percentage points faster than in September, according to figures from the Shanghai Statistics Bureau. From January through October, investment in the city’s property market declined 3.3% year-on-year to US$14.6 billion (RMB108.4 billion), and fixed-asset investment was up 8.1% year-on-year to US$47.4 billion (RMB354.0 billion), fuelled largely by public works.

This article first appeared in Chinese in the Oriental Morning Post on November 7, 2007. The China Perspective takes no responsibility for the accuracy of the original article