New rules regulating the use of overseas capital in the property market are imminent, according to Shanghai-based International Finance News, quoting an unidentified source.

 

The State Administration of Foreign Exchange (SAFE) previously announced that it would strengthen its monitoring of foreign capital in the property market. But it did not mention whether such a rule is necessary after the government issued a series of measures, including higher taxes and down payments, to cool surging home prices last month.

 

While foreigner investors claim that their interest lies in a general expectation of high returns from a prosperous sector in a rapidly growing country rather than speculation on the yuan's appreciation, local experts believe that speculation on the exchange rate is still the main drive.

 

But there have been growing calls recently for regulation of overseas capital in China's property market.

 

"The government should control the flow of overseas capital, and especially limit the short-term overseas capital's flow into China's property market and manufacturing business," Guo Shuqing, director of the China Construction Bank, said during the finance summit at the Ninth Beijing Hi-tech Expo.

 

"China does not lack capital, so a rule regulating overseas capital's entrance into the domestic property market is urgent," Xia Bin, director of the Finance Research Center affiliated with the State Council's Development Research Center. said.

 

SAFE figures show that foreign institutions spent US$3.4 billion purchasing property in China last year. Ministry of Commerce figures also demonstrate that China's property market used US$1.497 billion of overseas capital in the first quarter of 2006, a 47.67 percent increase from the same period last year.

 

According to property consultancy Jones Lang LaSalle, overseas capital had almost no access to commercial building development in China before 2005.

 

In 2004, foreign financial institutions including Australia's Macquarie Bank, Goldman Sachs and Morgan Stanley spent a combined US$450 million buying four commercial buildings in Shanghai.

 

Since 2004, overseas investors have been increasingly lured to China's real estate market to earn money from rental and property management fees.

 

The central bank's "China's Real Estate Finance in 2004," published last year, reported that the proportion of overseas capital to the total house purchasing capital in Shanghai had risen to 23.2 percent at the end of 2004, sparking media interest in foreign investment in the property market.

 

According to Stephen M Coyle, chief investment strategist of Citigroup Property Investors, the return on investment is 7 percent in China, much higher than Japan's 3.5 percent, Britain's 4 percent, and the United States' 4.5 percent.

 

"It is mainly because China is on a rapidly growing plane," he said. "Comparatively, the speed in the United States is slower."

 

Foreign executives believed that the nation's booming economy would support the property market's growth, which will be among the world's best performers in the next three years.

 

They pointed out that a fundamental demand existed for an economy that has grown at an average 10 percent for the past three years, especially in the east of the country.

 

Commercial offices, top-end residential housing and industrial properties are the top choices for overseas investors.

 

But does the yuan's potential to rise in value account for the flow of overseas capital into China's property market?

 

"It is not a wise move for us to bet on the appreciation of the yuan," Morgan Stanley's Carth Peterson said.

 

"The investment bank's real estate sector has no speculation on the yuan's appreciation," Peterson added.

 

Foreign executives denied that there is speculation on the foreign exchange rate; neither did they admit there is a connection between rising house prices and overseas capital.

 

"Overseas capital is mainly invested in top-end office buildings for the long term with the aim of getting profit from rentals," Yin Kunhua, a professor at the Real Estate Research Center of the Shanghai University of Finance and Economy, said.

 

Even though overseas investors are focusing on the commercial sector, some still believe that they are contributing to rising house prices in China's cities.

 

"Overseas capital is strong enough to influence the market and lead the price higher, and small investors in the sector sometimes have to follow them," said Chen Min, a private real estate investor.

 

(China Daily June 14, 2006)