1.  Background

On 15 November 2010, the Ministry of Housing and Urban-Rural Development (MOHURD) and the State Administration of Foreign Exchange (SAFE) jointly issued the Circular on Further Standardising the Administration of Property Purchases by Overseas Institutions and Foreigners ("Circular 186"), which re-imposes restrictions on the purchase of properties by foreign entities with a presence in China and foreign individuals.

The Circular is part of a series of rules implemented in recent years ostensibly to cool down China's real property market (some reports indicate foreign owners actually only account for less than 1% of the market in China). On the face of it, Circular 186 was issued to implement the wider macro-economic policies set out in the Circular on Firmly Restraining Rapid Growth of Real Property Prices in Certain Cities (Guo Fa No. 10 of 2010) issued by the State Council on 17 April 2010 and to strengthen the implementation of Opinions on Regulating Foreign Investment in Real Estate Market Access and Administration of Foreign Investment in Real Estate (Jian Zhu Fang No. 171 of 2006) jointly issued by six ministries on 11 July 2006 ("Circular 171").

  1.  Major Changes

2.1 Circular 186 is very similar to Circular 171 in terms of the line it takes. Apart from stating that foreign individuals and branches and representative offices established by foreign entities are only permitted to purchase properties in China for self-use, Circular 186 further clarifies that save as otherwise specified in laws and regulations:

  • foreign individuals are only permitted to purchase one set of commodity housing in China for self-occupation purposes; and
  • that branches and representative offices established by foreign entities in China are only permitted to purchase a non-residential property located in the place where the branch or representative office is established.
  1.  Document Requirements

When carrying out presale registration and title registration, Circular 186 specifically requires that foreign individuals that purchase commodity housing for self-occupation purposes must, in addition to other documents required by laws and regulations, provide a letter certifying the foreign individual's residence status in China issued by the relevant authorities confirming that such individual has been resident in China for more than one year, and a letter of undertaking certifying that the foreign individual does not own any other commodity housing in China. This latter requirement may be difficult to enforce on a nationwide basis, as there is no national database of property ownership in China. Shanghai, which is one of the wealthier and more modern cities, has only recently announced its intention to establish a searchable database of real estate ownership[1], so presumably this is some way off in many other cities.

Similarly, Circular 186 requires that a foreign entity that purchases property for self-use purposes must, in addition to other documents required by laws and regulations, present the business licence or registration certificate of its branch or representative office and a letter of undertaking certifying that the purchase of commercial property is genuinely for self-use purposes.

  1. Commentary

3.1 There is no reference at all in Circular 186 to the purchase of properties in China for purposes other than for self-occupation. We assume, therefore, that such purchases must still strictly follow the principal of "commercial presence" set out in the Article 1(1) of Circular 171 i.e. the foreign investor would first have to establish a wholly foreign owned enterprise (read taxable presence) in China in order to do so.

3.2 It is still not clear as to whether the properties bought by foreign individuals and foreign entities can be freely leased or sold after purchase. Beijing Municipal Government issued a circular entitled Circular on Regulating the Purchase of Commodity Housing by Foreign Entities and Foreign Individuals on 29 January 2007 (the "Beijing Circular")[2] which provides that such properties bought by foreign entities and foreign individuals must not be leased or sold after purchase without permission. Although the Beijing Circular should not apply to places outside Beijing, it does seem designed to put foreigners off purchasing property in Beijing. Having been the first municipality to have expressly relaxed the "one property rule" applicable to foreigners subsequent to the issuance of the Circular 171 and then reintroducing the rule later, it appears that Beijing seems to have executed more policy flip-flops than most, perhaps due to the higher reported percentage of foreign buyers. Foreign investors and residents could be forgiven for seeking a more stable and predictable policy in this regard.

3.3 As noted above, it is foreseeable that it will be difficult for the Chinese authorities to ascertain in practice whether the purchase of a property is genuinely for self-occupation given that China does not have a nation-wide property registration system: the officials would presumably have to visit the property in person to see if any tenants are living there, although they might be able to trace it through the lease registration process.

3.4 Circular 186 is silent on the penalty for breach of these restrictions, but it is clear that banks are being told to tighten up their scrutiny of documents before agreeing to carry out any conversion of foreign currency into RMB as part of a purchase by a foreigner or foreign entity, so the immediate impact may be a delay in approvals or refusals by banks to convert where they believe the conditions are not met.

  1.  Conclusion

Although we note that the Chinese government has also issued certain restrictive policies applicable to domestic investors (for example, the loan-to-value percentage for such investors has been reduced if the investors have bought more than one property in China) and the percentage down payment increased, these restrictions do not restrict purchases in absolute terms, only the number of qualified buyers. A wealthy cash buyer in China can simply carry on buying in the market despite the new restrictions; when one compares him or her with his foreign counterpart, the double standard is obvious. Hence the motivation behind applying these restrictive policies to foreign investors is somewhat questionable, given the relatively modest share of foreign investors in the market taken as a whole. Despite these policies, prices in many major cities in China such as Guangzhou and to a lesser extent Shanghai have continued to rise in recent months, suggesting the policy of reining in real estate prices is not able to fully achieve its aims.

We note that real estate markets are essentially regulated and administered day-to-day at the local level, so each local authority will have its own "spin" on which of these restrictions will be strictly enforced (and which less so). This will depend on local policies and priorities, but makes it difficult to generalise about enforcement of Circular 186 nation-wide. The only positive thing one can say about Circular 186 is that it does not appear to impose any additional restrictions on foreign-invested real estate developers than are already in place (they are already heavily restricted under Circular 171 and other related regulatory documents issued around the same time).

Whilst there is a genuine and understandable concern about foreign investment being a front for speculation on the RMB, the difficulty in extracting money from the real estate market for foreigners due to foreign exchange controls makes it difficult to imagine that this is an easy target for "hot money", which tends to need to move rapidly and freely from place to place. Therefore one view about the real motivation for issuing Circular 186 is that the Chinese authorities are, by implicitly suggesting that foreign speculators and "hot money" are somehow to blame for high prices, once again trying to distract attention away from the more fundamental issues which are causing price surges in the market, and putting the dream of owning a property even further out of reach of most ordinary people in China.