China To Restrict Foreign Investment In Real Estate To Curb Price Boom

by Mary Swire, Tax-News.com, Hong Kong

26 July 2006

The Chinese government is to place restrictions on foreign real estate investors in a bid to curb speculative investment and cool the country's soaring property prices.

According to a joint circular issued by six government agencies and published on the website of the state media agency Xinhua, new regulations will mean that foreigners seeking to buy homes in China will not be permitted to do so until they have resided in the country for at least twelve months. This restriction will not apply to Chinese nationals living in Hong Kong, Macao and Taiwan who buy houses for their own use.

Furthermore, individuals and institutions will be required under the new regulations to set up a company to purchase property that is not intended for their own use.

The regulations will also impose capital restrictions; for foreign real-estate developers, this will mean that the ratio of registered capital should be more than 50% of any project that surpasses US$10 million, up from 33% currently. Foreign-funded firms will also face restrictions on taking out loans or engaging in foreign exchange transactions if the capital they contribute is less than 35% of the amount of their total investment.

The report failed to detail when the proposed measures would go into effect.

The Chinese government has tried a variety of tax, regulatory and monetary measures in order to avert a real estate market bubble, but the measures seem to have had little effect. In May, it was reported that China would in certain cities apply the previously unenforced 20% tax on capital gains from property transactions on houses sold within two years of purchase. Previously the law, which came into force in 1994, applied to sales within five years. The law would also apply a tax of between 2% and 5% on the full transaction value if the capital gain could not be established.

China's largest cities have seen dramatic increases in property prices recently. In Beijing, prices rose 14.8% in the first three months of this year - compared to a year earlier - to 6,885 yuan, or US$860, per square meter, according to the city government. Prices in the southern city of Shenzhen have risen by 25%, and prices in the north-eastern city of Dalian have jumped by more than 10%, government data showed.

Meanwhile, the number of newly-established foreign-invested property firms increased by 25.4% in the first half of this year, compared with the same period last year, according to China Daily.

Chinese Premier Wen Jiabao has stated that the government will continue to adjust tax, credit and land policies to curb speculation and ensure an adequate supply of affordable housing for low and middle income citizens, despite his assertion that China's property market is "under control".

In April, the State Administration of Foreign Exchange reported that overseas institutional investors bought US$3.4 billion worth of property on China's mainland in 2005. However, some analysts suspect that the real figure was much higher.

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