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Print Edition> Business
UPDATED: January 27, 2011 NO. 5 FEBRUARY 3, 2011
Stopping the Flood
China looks to alleviate pressure from inflows of international hot money by enhancing restrictions on the housing market

SURGING PRICES: Consumers attend the 2011 Hainan Winter Real Estate Exhibition on January 1, 2011. House prices in China rose substantially in 2010 despite austerity government policies (GUO CHENG)

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 long-term 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 financing 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 difficulties 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 financial investments and extended their reach to upstream sectors like construction materials, building and design, he said.

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 inflows 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.

MOFCOM's measures to strengthening supervision on foreign investments in the property sector

1. Local commerce administrations should strengthen checks and supervision on property projects that involve foreign investments. The provincial-level commerce administration should focus on rechecking the completeness of land documents, including contracts of transferring state-owned land use right signed by the property developer and land administrative body, land use licenses, and other land trade credentials.

2. Foreign-funded property companies are not allowed to make profits through buying and reselling real estate projects, which will be strictly monitored by the Ministry of Commerce, along with the Ministry of Housing and Urban-Rural Development and the State Administration of Foreign Exchange.

3. No investment companies involved in property development and operation should be approved.

4. Local commerce administrations, together with the State Administration of Foreign Exchange, should tighten scrutiny over property investment companies funded by return investment and strictly control investment in domestic real estate enterprises by means of return investment.

5. Supervision on new real estate projects or capital increases in real estate projects through mergers and acquisitions and shareholder contributions should be strengthened.

6. The provincial-level commerce administration should strengthen service and guidance on foreign investments and promote the development of energy-saving and environmentally friendly construction projects.

(Source: www.mofcom.gov.cn)

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