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

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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.