Liu Yi

Run Ming Law Office

yinyj@runminglaw.com

The China Real Estate Finance Report published by the People’s Bank of China (PBOC) reported foreign capital accounted for 23.2 per cent of total investment in Shanghai’s real-estate sector in the fourth quarter of 2004, compared with a mere 8.3 per cent in the first quarter of 2003.

Riding on the real estate boom and anticipating the steady RMB appreciation, investors have poured increasing amounts of capitals into real estate markets in the major Chinese cities such as Shanghai and Beijing through various channels, taking up villas, luxurious apartments and high-quality commercial and office buildings. This has prompted Chinese government to reign in the establishment of foreign invested enterprises (FIEs) in real estate and the financing of real estate development by such FIEs.

A review of the laws (new laws or new regulations) may shed some light on the current situation of financing foreign invested real estate project.

Laws Regulating Foreign Investment in Real Estate promulgated since July 2006

(i) Opinions on Regulating Market Access and Administration of Foreign Investment in the Real Estate Market (JIANZHUFANG [2006] No.171) (Opinion 171) jointly promulgated by the Ministry of Construction (MOC), the Ministry of Commerce (MOFCOM), National Development and Reform Commission (NDRC), PBOC, the State Administration for Industry and Commerce (SAIC) and the State Administration of Foreign Exchange (SAFE) on July 11 2006;

(ii) Circular on Issues concerning the Regulation of the Administration of Foreign Exchange in Real Estate Market (HUIFA [2006] No.47) (Circular 47) jointly issued by SAFE and MOC on September 1 2006;

(iii) Circular on Further Strengthening and Regulating the Approval and Administration of Foreign Direct Investment in Real Estate Industry (SHANGZIHAN [2007] No.50) (Circular 50) jointly issued by MOFCOM and SAFE on May 23 2007;

(iv) Circular on Issuing the List of the First Batch of Foreign-Invested Real Estate Projects Having Passed the Procedures for Filing with the Ministry of Commerce (HUIZONGFA [2007] No.130) (Circular 130) issued by SAFE on July 10 2007; and

(v) Circular on Better Implementation of the Filing of Foreign Investment in Real Estate Industry issued by MOFCOM and effective on July 1 2008 (2008 MOFCOM Circular)

Impact of New Laws on Financing of Real Estate Projects with Foreign Investment

Commercial loan is still the most common financing method at the present time (other options include trust loans, short term bonds, etc.). For FIEs seeking international commercial loans (ie foreign currency loans not granted by banks in China but by a lender offshore), prior approval from governmental authorities is not required. However, the sum of accumulated medium- to long-term foreign debts or external debts and the balance of short-term foreign debts must not exceed the difference between the total investment of the project approved by the government and the registered capital of the FIE (according to the Opinion 171 and MOFCOM 2008 Circular - FIEs engaging in real estate development shall have a registered capital no less than 50 per cent of their total investment).

However, since 2006 China has tightened its control on the inbound and outbound remittance of foreign exchange and conversion of foreign currencies into RMB in connection with foreign investment in China’s real estate market. As provided in the new regulations referred to above:

• SAFE will not accept application from an FIE engaging in real estate for carrying out foreign debt registration, or converting international commercial loans into RMB, if it has only obtained its approval certificate from the MOCOM or local bureau of commerce, and then been approved for filing by the MOCOM (or local bureau of commerce), after June 1 2007;

• for an FIE engaging in real estate that has obtained its approval certificate after June 1 2007 but has not been approved for filing with the MOCOM (or the local bureau of commerce), SAFE may not carry out foreign exchange registration (or amendment of such registration) for the FIE, or allow foreign exchange settlement for the FIE in relation to capital account items; and

• for an FIE engaging in real estate that has not paid up its registered capital, or has not obtained a State Land Use Right Certificate for its real estate development project, or its project capital (note the laws do not state clearly what kind of capital would be regarded as “Project Capital”. Based on our best understanding, “Project Capital” refers to the capital contributed by the investors for the development of the project, which can not be withdrawn) is less than 35 per cent of the FIE’s total investment amount, banks in China are prohibited from extending loans to it.

Conclusion

Foreign exchange controls play a significant role in closing the financing channel for FIEs engaging in real estate. However, we believe that the restriction on the capital account is not effective. It reflects the Chinese government’s concerns about the burst of the real estate bubble and the inflow of “hot money”, but also brings fresh disagreements on the administration of foreign direct investment.

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