By issuing the Opinions on Regulating the Access to the Real Estate Market by Foreign Investors and the Administration Thereof (Document No. 171) by the Ministry of Construction, Ministry of Commerce and other ministerial level authorities in July 2006, China turned to strictly restrict foreign investment in real estate. Document No. 171, the first shot in such restriction, and the series of subsequently issued policies are known as the “order restricting foreign investment”. Various ministerial level authorities subsequently issued a series of complementary policies strengthening the restrictions, comprehensively containing foreign investors’ access to the Chinese real estate market.
However, with the slowdown in the Chinese economy, China’s attitude towards foreign investment in real estate has also shown a marked change, witnessed by a gradual loosening in the previously issued restrictive policies. In November 2015, the system of recordal of foreign investment in real estate was abolished.
Restrictive period. In 2003, the real estate industry was formally recognized in state policy as a pillar of the national economy and from this point real estate prices began a sharp rise which lasted five years. Stimulated by Renminbi appreciation expectations and supernormal profit, offshore funds began to pour into the Chinese real estate industry in 2006, with a not inconsiderable amount being international fluid capital, i.e. so-called “hot money”, running after short term returns. This further inflamed the domestic real estate market, accompanied by a continuing increase in the state’s foreign exchange reserves, excess domestic liquidity, a rise in inflation and the beginning of an asset bubble.
Between the issuance of Document No. 171 in 2006 and 2007, the Chinese government, faced with such a situation, issued a series of policies, with Document No. 171 at its core, restricting foreign investment in real estate in an effort to rein in the irrational rise in property prices. The document established the principles of “commercial existence” and “for own use” for foreign investment in real estate, raised the total investment to registered capital ratio to not less than 50% and prohibited fixed returns and disguised fixed returns.
The Provisions on the Acquisition of Domestic Enterprises by Foreign Investors imposed restrictions in such areas as the the approval of foreign acquisitions, retention of the status of domestic natural person shareholders, anti-monopoly reviews, etc. and essentially blocked the path to offshore red chip listings by domestic real estate enterprises. The Notice of the State Administration of Foreign Exchange on Issues Relevant to Regulating Exchange Control Relating to the Real Estate Market mainly continued to clarify the basic principles of Document No. 171.
2007 was a watershed year for the Chinese real estate industry. During the first half of the year, investment and real estate prices continued to rise at a fast clip, compelling the government to repeatedly intensify its macro control policies. However, by the second half of the year, market purchasing power finally began to weaken as it no longer could bear the stratospheric prices.
The theme of “restriction” continued to run through policies on foreign investment in the real estate industry during this year, including specification of the “project company system” principle, a further tightening of the screws on investment round tripping, prohibition on the taking out of foreign debt and expansion of the scope of the restrictions on access to the industry.
Transition period. Beginning in 2008, the Chinese real estate industry experienced a process of consolidation followed by decline. The issuance of the “order restricting foreign investment” was intimately connected with the rise in China’s economic power, as well as a product of the appreciation in the value of the Renminbi, excessive liquidity and an asset bubble, signaling a fundamental change in China’s policies on the use of foreign investment. However, battered by the global financial crisis, international investment banks began a large scale pull back from the Chinese market, and the macroeconomic environment in which the “order restricting foreign investment” was issued experienced a disruptive change. Beginning in the second half of 2008, local governments began to relax their attitude towards foreign investment in the industry, some even going as far as flexibly using policy to attract foreign investment.
However, with the issuance of the Chinese government’s RMB4 trillion economic stimulus policy, the Chinese economy in 2009 described a “V” shape, rebounding vigorously from the valley bottom, accompanied by skyrocketing real estate prices that only began to consolidate after 2013. Policy during this period continued to tighten restrictions while also making appropriate adjustments and allowing for moderate relaxation. These included delegating some of the authority for recordal work to lower levels, placing restrictions on investment in real estate by foreign-invested investment companies and continuing to delegate the authority for the approval of foreign investment to lower levels.
Loosening period. Beginning in 2014, the real estate industry entered a comprehensive adjustment phase, and following several years of macro control, real estate prices began a downward slide. With the slowdown in China’s economy, lowered expectations of Renminbi appreciation and internationalization of the currency, the effect in the past of funds outstanding for foreign exchange on domestic inflation greatly weakened. By 2015, foreign exchange reserves were declining month by month and the state’s policies restricting foreign investment entered a comprehensive loosening phase. This included comprehensive delegation of recordal and approval authority to lower levels, relaxation of restrictions on the conversion of foreign exchange, relaxation of the restriction on the “total investment to registered capital” ratio relating to foreign investment in real estate enterprises and abolition of the recordal system.
At present, foreign investment in domestic real estate essentially enjoys national treatment identical to that of domestic investors, save for the continued obligation to comply with the “commercial existence principle” and the restriction on taking on foreign debt.
The changes in policy on foreign investment in real estate serve as a barometer for the Chinese economy. From the perspective of the overall trend towards economic globalization and trade liberalization, the utilization of foreign investment remains one of China’s long-term strategies. Policy is formulated for the purpose of more effective public administration. With changes in the economic situation, implementing flexible regulatory systems that are stricter or looser depending on the times is perhaps China’s future philosophical and practical direction when it comes to the treatment of foreign investment in the real estate industry.