Key Points:

  • Real estate FIEs required to have obtained MOFCOM approval or have funding sources restricted
  • Foreign investors must obtain land use and real estate ownership prior to establishing FIE
  • FIEs restricted from expansion prior to approval

With a view toward increased control over the development of the real estate market, MOFCOM and State Administration of Foreign Exchange (“SAFE”) have issued the latest in a series of measures with respect to control, supervision and financing of real estate purchases by foreign invested enterprises (“FIEs”). The latest among these, issued on July 10, 2007, is SAFE’s Issuance of the List of the First Group of Foreign Invested Real Estate Companies Filed with the Ministry of Commerce (“Circular 130”). Through Circular 130, SAFE seeks to restrict the sources of approved funding for FIEs that have not obtained approval or have not fulfilled the filing requirements of MOFCOM by June 1, 2007.

Specifically, SAFE will not approve or process any foreign loan registration or conversion for any FIE that obtained its approval certificate and completed MOFOCM filing requirements on or after June 1, 2007 or any foreign loan registration or conversion, any foreign exchange registration or foreign currency conversion for any FIE that did not complete MOFCOM filing requirements by June 1, 2007. In addition, SAFE will not approve increases in registered capital for FIEs that have not completed filing requirements for such approvals with MOFCOM prior to the June 1, 2007 deadline.

These restrictions generally mean that new FIEs must either have more money for the registered capital or obtain the needed funding from domestic sources. Foreign sources for loans are prohibited for new FIEs.

This past May, SAFE, along with MOFCOM, issued the Notice on Further Strengthening and Regulating the Examination, Approval and Supervision on the Direct Investment of Real Estate Industry by Foreign Investors (“Notice 50”). Notice 50 is intended to strengthen the controls and restrictions on FIE approval and activity in conjunction with previous measures passed by MOFCOM; i.e., the Opinion on the Regulation and Administration of the Access to the Real Estate Market by Foreign Investors (“Opinion 171”) and the MOFOCM Notice Implementing the Notice on the Regulation and Administration of the Access to the Real Estate Market by Foreign Investors (“Notice 192”). Several provisions in Opinion 171 and Notice 192 are

expanded upon in Notice 50, which mentions that despite conscientious implementation and considerable success in achieving the aims of Opinion 171, problems still exist. Furthermore, Notice 50 emphasizes strict implementation of the provisions of Opinion 171 and Notice 192.

The key features of Notice 50 include the requirement that foreign investors obtain land use rights and ownership of real estate buildings (or agreements to obtain ownership) prior to establishing an FIE. Furthermore, FIEs are not explicitly or otherwise permitted to circumvent the formal application requirements for mergers and acquisitions or investment in domestic real estate enterprises by changing the controlling structure of such an enterprise. Upon the discovery of such activity, the FIE is subject to investigation by SAFE for violation of foreign exchange rules.

FIEs are also restricted from broadening their business scope by engaging in expanded development or operations activities prior to obtaining approval from relevant authorities. These local authorities are directed to stop allowing FIEs to take control of local projects and to stop favorable treatment of FIEs. Local authorities are also directed to report all approvals of FIEs to MOFCOM promptly.

It is apparent that these latest measures increase cooperation between local and state MOFOCM authorities in regulating the real estate market by raising the accountability of local authorities and controlling the preferential treatment and abuse of discretion in granting approval of relevant real estate enterprises. Concurrent with these benefits, however, are increases to the existing considerable hurdles to real estate investment for FIEs via heightened scrutiny of applications for approvals and expanded business operations and partnerships, as well as further limits on sources of approved financing. The latest measures seem to represent a trend toward serious curtailment of investment by both new and established real estate FIEs. The significance of the measures’ impact on China’s lucrative and growing market remains to be seen.