New guidelines for FDI creating confusion, uncertainty in real estate sector

Posted by Reading Time: 3 minutes

By Andy Scott

SHANGHAI, Nov. 15 – The new catalogue for foreign investment, released on November 7, aims to address some of what Beijing perceives as structural problems in China’s economic development. Chief among these is limiting the inflow of foreign direct investment into industries that do little to tackle some of Beijing’s major problem areas – real estate, mining and non-renewable mineral resources, and conventional manufacturing.

Real estate
Foreign investment in the real estate industry has been declared dead. From China Law Blog to Stan Abrams of China Hearsay, everyone is agreeing that the new restrictions will not only significantly limit FDI in the sector, but kill it. As Steve Dickinson writes, “the effect of these provisions, when combined with the prior regulations, is to effectively eliminate most areas of foreign investment in real estate.”

That sentiment however is not universal and many analysts and investors remain puzzled over the likely impact of the new catalogue.

“I do not see any impact on the physical market or on our funds investing in China,” Richard van den Berg, managing director of ING Real Estate Investment Management told the South China Morning Post.

Causing confusion among analysts are some of the new changes to the foreign-invested property sector. Where foreign investment in new residential developments was previously listed in the “encouraged” category in the 2004 catalogue, it is now absent. However, such projects are also missing from the “restricted” and “prohibited” categories as well.

Foreign investment in property brokerages and agencies now falls under the “restricted” category in the new catalogue, along with FDI in luxury villas and hotels.

However, as the South China Morning Post reports:

“There is only one line in the revised guidelines saying foreign investment in the real estate brokerage or agency companies will be restricted,” said Andy Lee, a general manager of Cetaline (China) in Shenzhen.

“So it is difficult to evaluate the impact. We have contacted local government officials but they have not yet received any instructions on how to implement the guidelines. Whether it will only affect newcomers or include us, I don’t know.”

While FDI in hotels is now banned on the mainland, unlikely to affect most Western investors such as Accor or Sofitel who tend to manage Chinese-owned hotels and hotel chains on long-term contracts.

“Where it will affect foreign investment is the Hong Kong and Singaporean real estate companies,” said the general manager of a large international hotel chain in Shanghai. “The Taiwanese, Hong Kong and Singaporean developers who put money into building these hotels will be affected, but the impact on the larger, international hotel brands will be negligible.”

A look at the Hang Seng listing of many of the main property developers speaks to the uncertainty of the market, with several posting slight gains and other slight losses. Overall though, the verdict remains out on the impact the new catalogue will have in the sector.

Mining
Changes to the new catalogue that will impact companies in the mining sector include a reclassification of tungsten, molybdenmum, tin, antimony and fluorite into the “prohibited” category, under the 2004 catalogue, these minerals were classified as “restricted.”

In addition, joint ventures, where the Chinese side must own a controlling stake is now required in the exploration and mining of specialty coal such as coking coal. Sea sand mining will also require Chinese majority shareholding.

These changes were expected and should not have big impact on most FDI in the sector as the restrictions focus on specialized mining processes. A move from the “restricted” category to the “prohibited” category also is not as significant as a move from the “encouraged” category to the “restricted” category. In the case of sectors and industries that were restricted in the 2004 catalogue and are now prohibited, it is unlikely that significant FDI was allowed into the field in the past.

Other significant changes
One sector where foreign investors can expect significant encouragement is in high-tech industries. As Beijing pushes FDI into high-tech industry, look for multinational companies to establish more research centers throughout the country. According to Xinhua, China plans to focus on nine major special projects in the new few years, including integrated circuit and software, new generation mobile communications, next generation Internet, digital voice and video technologies, advanced computing, biological medicine, commercial airplanes, satellite as well as new materials.

Foreign companies can also now invest in futures companies, although under restricted guidelines, something that was banned in the 2004 catalogue. According to the 2007 catalogue, the Chinese side of the JV must have the controlling shares in the foreign-invested future company.

The ban on FDI in the futures market has been removed as capacity expands and Beijing seeks to raise the operational levels of domestic futures companies and promote the development of the overall market.

The Ministry of Commerce reported that the government English language translation of the new catalogue will be released at the beginning of December. AmCham members may login and receive a unofficial translation of the “restricted” and “prohibited” categories of the 2007 catalogue. For those looking to compare the new catalogue to the previously issued 2004 catalogue, it can be found here.

5 thoughts on “New guidelines for FDI creating confusion, uncertainty in real estate sector

    Chris Devonshire-Ellis says:

    There has been a lot of ill-thought out nonsense doing the rounds about concerning this topic, and comment raised by a handful of US lawyers dealing in China, especially the impact on FDI in the real estate industry. The truth is: WHAT FDI in the Chinese real estate industry ? Much of it falls into four categories:

    1) Chinese domestic investors;
    2) Chinese investors round tripping by setting up companies in HK, Singapore, Mauritius etc to appear to be foreign investors to obtain the old tax incentives that used to apply to FDI in this sector;
    3) Hong Kong property developers
    4) Taiwanese property developers

    There has never been a huge influx of American or European money into Chinese real estate, it’s a myth. Additionally, concerning hotels now being barred from FDI in the sector, as you point out, many are management contracts only and they do not usually own the property. So the new regulation does not affect them.

    The people that would be affected are the property developers in Hong Kong & Taiwan, and there are some major listed companies there, with significant China development portfolios. If it was a truly negatively viewed re-positioning of China’s real estate policy concerning foreign investment into China (both Hong Kong and Taiwan investments into China are considered ‘foreign’) then you’d expect their share prices to slide. But they didn’t move much, and some even went up. Andy just quoted Richard Van den Berg, managing director of ING Real Estate Investment Management in Hong Kong, and so shall I: “The Chinese governments position on land development or investment has been incorrectly interpreted by some observers as adding a new layer of restrictions on FDI in the mainland property market”.

    I agree with that position. Comments on blogs elsewhere have been largely knee jerk reactions, albeit mainly written by foreign lawyers, mainly of whom have developed a “China is difficult” mentality through their work, which can be understandable. But that does not apply to this situation, and neither does it apply to the new labor law legislation. China’s regulatory regime concerning FDI is moving very much in the right direction. And if the real estate developers in HK and Taiwan, who are most exposed to mainland China investments shrugged off the FDI property development reform with a “So what?” via share prices and local market sentiment, then why should American lawyers commenting on blogs get so upset about it ?

    There’s far too much foreign negative opinion about when it comes to knee jerk reactions on Chinese legal or investment reform, and this lawyer, for one, has seen far too much before in China to get too excited about perceived restrictions when none actually exist.

    China and I says:

    Hi Chris,

    I concur with you concerning the inflow of FDI in the real estate market, mostly money comes from Taiwan, Singapore and HK or Mainland Chinese through offshore companies. From first hand information I have, I can tell you large Hotel management companies are not only developing contract management but also building and managing their own Hotels. Accor is an example.
    Concerning pure real estate market, some American friends working American investors in China for some years now told me if implemented the new guidelines would be a killer for them. Currently, they have a wait-and-see approach on the situation. Time will tell!
    Concerning the decision in itself by the Chinese governement to “restrict” FDI in the real estate market, I agree it is a smart move and I was not surprised!

    Beijingren says:

    At least there’s one consultant who doesn’t go off on a wobbly every time China revamps its regulations. A well said and sensible position when elsewhere people lost their heads. Your right it has had little effect on the market.

    Andy says:

    I bought two new residential properties in Beijing in 2006. They are just being completed now. The purchase was made (and money converted) prior to any changes being made in legislation. Does anyone know whether I am legally allowed to own the properties and what should I do- given now you must be in Beijing for a year and cannot speculate?

    some help would be much appreciated- I want to follow the laws and make sure I do everything correctly

    Andy

    Andy Scott says:

    Dear Andy,

    Based on your question, maybe yes, but also maybe no, it is impossible to tell without more information. I encourage you to contact the Beijing office of Dezan Shira & Associtates at beijing@dezshira.com for more information.

    Regards,
    Andy Scott
    Editor
    China Briefing

Leave a Reply

Your email address will not be published. Required fields are marked *