China’s New Restrictions Concerning Foreign Investment in Real Estate
Nowadays, the return of the investment in China’s real estate market exceeds 15%, which is higher than that of European countries or America. In Asia, the return of the investment in residential property, business plaza and shopping store in the mainland of China is the highest. Therefore, offshore capital flows into the China’s real estate market constantly these years by two ways: (i) purchasing the shares of real estate in B stock’s market of China; (ii) purchasing residential or commercial properties personally or through the foreign invested enterprises.
From 2006, the price of residential or commercial properties keeps high since the investment in real estate is too heated. To adjust such conditions, some measures are taken by the government. The adjusted fields include not only residential property, but commercial and industrial real estate as well. In July 2006, six ministries and commissions including the ministry of commerce jointly published ‘Opinions Concerning Regulating the Access to and Administration of Foreign Investment in the Real Estate Markets’ (hereinafter referred to as ‘opinions’. Additionally, on January 29 2007, ministries and commissions of Beijing published ‘Notice Concerning Regulating the Purchase of Residential Property by Foreign Institutions and Foreign Individuals’ (hereinafter referred to as ‘notice’.)The notice as the detailed implementation rules of ‘opinions’ restricts the foreign investment in residential property to some extents.
I. One person can buy one residential property only
In the ‘opinions’ and ‘notice’, it is the first time to define the ‘original name system’ and the standard of ‘owner occupation’ concerning the purchase of apartment by foreigners. The ‘original name system’ means that the foreign institutional buyer shall submit the approval certificate of the establishment of branch or representative office; the personal buyer shall submit the certificate that he has studied or worked in China for more than one year. Additionally, the ‘notice’ provides the requirement of ‘owner occupation’, the standard of which is that personal buyer shall buy one apartment for self-occupation; and the foreign institutional buyer only can buy the apartment for its business in the city where its branch or representative office is located.
The “opinions’ further requires that if the total amount of investment exceeds 10 million USD (including 10 million USD), the registered capital shall not be lower than 50% of the total amount of investment; if the total investment amount is lower than 10 million USD, the registered capital is 35% of the total investment amount. To avoid this requirement, many investors invest in developing residential property instead of purchasing the property.
II. Limitations of real estate development
The ‘opinions’ provides that transfer of shares and project, mergers and acquisitions shall be examined and approved by governmental departments like the Ministry of Commerce. Investors shall submit all kinds of contracts, the guarantee of licenses, and the certificate of land use right, etc. when doing the application. During the process of foreign exchange registration, the ministration department of foreign exchange will supervise the performance of obligation by investors; provide the service of registration of foreign exchange and the alteration of registration. This provision is to avoid investors speculating in real estate markets through the transfer of shares or mergers and acquisitions and prevent the use of land from being changed or the normal approval procedures of the inflow of foreign capital from being avoided.
III. Policies of unifying management of domestic and foreign enterprises
The ‘opinions’ and ‘notice’ provide that the administrative department of foreign exchange shall not approve the loan and settlement of foreign exchange of the company if the company’s registered capital is not fully paid, the certificate of land-using right is not obtained, or the capital of the project doesn’t reach the 35% of the total investment amount. This provision does not mean that the policies regarding the loan and foreign exchange management for foreign enterprises become much stricter, but to make the policies of domestic enterprises to invest real estate and those of foreign investors be consistent. This is not only the needs for stabilizing the real estate markets, but the measures to prevent foreigners from speculating in real estate markets. If the foreign companies which do not meet legal requirements get a foreign loan, the department of foreign exchange shall not provide registration or settlement service. The appointed bank cannot allow such capital to enter into the account and to be settled either.
Meanwhile, the new regulation of foreign exchange management says that, according to the requirement of the foreign investor’s qualifications, the capital in the foreign currency account deposited by foreign institutions or individuals cannot be used to develop or operate the real estate before such capital being transferred into new foreign currency account of the foreign invested enterprises established later on.
IV. Different Treatments
The ‘opinions’ and ‘notice’ provide new articles with regard to the residential property purchased by foreign institutions and individuals for own occupations. It is necessary to enhance the supervision of them in long term. For those foreign individuals who have worked for more than 1 year within the territory of China, they have fallen into the category of inhabitant in the meaning of national economy as their economic activities’ results are reckoned in China’s GDP. Therefore, it is natural for them to enjoy some national treatments and to be allowed to purchase residential or commercial property for living or work. On the other hand, for those foreigners who haven’t worked for more than 1 year within the territory of China, their necessity of living can be settled through lease.
For the residents in Tai Wan, Hong Kong and Macao regions, and overseas Chinese having close relationship with the mainland, China, the ‘opinions’ stipulates that they can buy the residential property with limited square meters for self use in China. This is the preferential policy for those persons and distinct from other foreigners, which reflects the continuity of the current policy of purchasing houses by the residents of Tai wan, Hong Kong and Macao and overseas Chinese.
Then what the ‘limited square meters’ means? The department of construction does not make detailed provisions. However, other departments say that there is no definite standard of ‘limited square meter’, which just reflects the continuity of the current policy of purchasing houses by the residents of Tai wan, Hong Kong and Macao and overseas Chinese. The overseas Chinese who have purchased houses will not be influenced either.
V. Principle of ‘owner occupation’
The ‘opinions’ and ‘notice’ provide that the foreign institutions and individuals who meet the legal requirements of qualifications and buy the residential property for self-occupation must use original name in order to avoid the speculation in real estate markets and safeguard its stabilization. Using original names is necessary for governmental institutions to supervise the real estate markets.
Principle of ‘owner occupation’ during the real estate transaction serves as that within Chinese territory, foreign individual buyer can buy one residential property for own occupation; and the foreign institutional buyer only can buy the commercial property for its business use in the city where its branch or representative office is located. All the departments of real estate shall improve the transaction information registration system; emphasize the registration of presale contract. Foreign institutions and individuals shall not be ratified if they violate the principle of ‘owner-occupation’.
VI. Procedures change concerning the capital to buy the real estate and settlement of foreign currency
With the publication of ‘opinions’ and ‘notice’, the detailed procedures concerning the capital to buy the real estate and settlement of foreign currency for foreign enterprises, institutions and individuals have been changed. For the future, only who adheres to the principle of ‘owner occupation’ can be approved to do the formalities relating to foreign exchange. Foreign institutions and individuals who remit the capital from foreign countries or pay for the real estate property directly from the domestic foreign currency account shall be examined and ratified by the appointed bank and then transfer such capital to the RMB account of developer after the foreign currency being settled. They must not transfer the foreign currency to the foreign currency account of the developer directly.
If the transaction failed and the RMB needs to be changed into foreign currency and remitted to outside China, after the examination and approval by the appointed bank, such capital can be remitted back into the account in foreign countries. Additionally, if foreign institutions and individuals sell its residential or commercial property to others and got payment of RMB, such capital also can be settled into foreign currency and remitted to outside China after being confirmed by the department of foreign exchange which the real estate is located.
The publication of the ‘opinions’ and ‘notice’ is just because China has no policy to control the speculating in real estate markets like the measures of high tax of developed countries to avoid high profits through speculation. Taking Korea as an example, to push aside the unnecessary needs of residential property, Korean government stipulates that one family only can buy one residential property.
At present, although new policy applied some foreigners use other means to avoid above mentioned limitations. For example, policies only provide that one foreigner can buy one apartment only, so his spouse or other relatives also can buy another residential property; additionally, for those foreigners who do not meet the requirements of qualifications, they can buy residential property through the cooperation with Chinese and then share the ownership with their Chinese partners
Written by
Sunny Chen
Legal Assistant
Allen & John Law Firm
Date: Feb. 11, 2008