China property investment regulations, Sept 2007

Implications: Several rounds of tightening regulations around foreign property investment in China. Despite this investment has increased as have property prices across the country due to high returns and currency appreciation.

Analysis:

This is the latest in a series of measures targeting foreign investment as well as other measures aimed at slowing the pace of property price inflation in China.

In recent years no foreign investor that I am aware of has used local debt to buy land in China. So the new regulations have no effect on this.

A clear set of regulations would probably be more beneficial that this creeping barrage of hurdles to foreign investors. Interestingly a couple of years ago foreign investors were most concerned about repatriation of funds. Now the question is more about whether they can get the money into China at all or not which requires several layers of approval. No one is asking about repatriation anymore.

Chinese real estate investments are sought by overseas individuals and investment funds because of the attractive returns available and the prospect of currency appreciation. It is unclear exactly how these investments have been illegal in the past; undesirable may be a more accurate term to use.

Usually in Chinese legislation a set of enforcement guidelines are issued after the main regulations. Often the regulations are issued and may not be followed by any enforcement guidelines which means the regulations are quietly being dropped without being formally rescinded. Foreign investors typically have trouble coming to terms with this feature of Chinese law.

Foreign investors have mixed track records. Some with a decade or so experience are still able to find ways to get things wrong. Later entrants like Morgan Stanley and Macquarie have the best track records to date.

Second and third tier cities have much to benefit from foreign investment and are therefore attractive but investing in locations that are entirely unfamiliar to investment committees in San Francisco, London or New York can be troublesome.