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By William Patalon III
Money Morning/The Money Map Report
The United States and Great Britain may not be the only world economies whose growth gets crimped by a runaway housing market.
A newly initiated state survey of foreign investment in China's soaring real estate sector has sparked fears of new curbs aimed at halting zooming home prices in that Asian nation.
According to the state-run shortwave radio service, China Radio International, the survey was initiated late last month by China's State Administration for Industry and Commerce, also known as SAIC. It was announced via an "urgent notice" on the official Web site of the SAIC's Registration of Foreign Invested Enterprises unit.
The announcement spawned some major worries because so few actual details were released.
Government Mum on Survey's Status or Purpose
At a time when China's central government is already worried about general inflation and a speculative atmosphere that continues to hang over its stock market, restrictions on foreign investment in real estate are yet another thing that could lance the speculative bubble that many experts believe has been fueling that country's dramatic economic and stock-market growth over the past year or so.
Because it's still a developing economy – even with its impressive size – China is largely incapable of fueling and maintaining a "bubble" economy without substantial foreign capital. With stock prices there having already slumped, speculators who have been profiting from China's spectacular growth are likely fearful that restricting foreign investments could touch off a financial-markets implosion similar to the bursting of the dot-com bubble in U.S. stocks in 2000, or like the bursting of the U.S. housing bubble last year.
It's happened before. In the early 1990s, emerging markets enjoyed a massive run-up in one year – with some stock markets, like that of Hong Kong, soaring as much as 90% in less than 12 months. But when concerns about the economic health of key emerging economies surfaced, foreign investors pulled out of those stock markets, and they plummeted – and subsequently failed to budge for several years after that.
That's not likely to happen in China. In an interview late last year, investment guru and Asia expert Jim Rogers said that even if China's stock market were to plummet, that country's economy would remain healthy, and would continue to advance unchecked. Rogers generally knows what he's talking about: He and his family now live there; and his latest book, "A Bull in China: Investing Profitably in the World's Greatest Market," – a detailed look at a very complex market – has just debuted and is expected to be another best-seller for the former hedge-fund whiz.
Questions About "Survey" Abound
Citing a well-informed source, the Shanghai Security News reported Monday that the real estate survey was initiated last November after China's Ministry of Construction started to survey existing policies designed to restrict foreign investment in China real estate. But sources with the SAIC's Shanghai and Beijing branches maintained that the survey was actually initiated only to collect and compile national statistics for internal government use.
The Registration of Foreign Invested Enterprises has declined comment on the status and the purpose of the survey. But industry insiders say that the government may be making preparations to institute further policies.
Throughout last year, China's government developed a package of policies that were aimed at preventing a flood of foreign money from washing through that country's real estate market. Some of those policies actually put some real teeth into an approval process that foreign investors must go through before they can buy real estate in China. The policies also made it easier to supervise the flow of foreign money into the housing market. And the ultimate goal, obviously, was to make sure that a torrent of uncontrolled foreign capital didn't leave China's housing market looking [figuratively speaking] like a coastal city in the aftermath of a tsunami.
Climbing the Wall of Worry
Official figures from China's National Bureau of Statistics showed there might be a cause for concern, unveiling a rapidly accelerating inflow of foreign money into a sector already on the cusp of over-revving.
In July 2006, China raised the required ratio of registered capital in property developers' overall investment plans for a development, a major step in its effort to regulate its real estate market and to cap speculation. At the time, China also placed tougher restrictions on residential property purchases by foreign institutions and individuals. Under the rules it put in place, only foreign institutions that would be establishing branches or representative offices in China – and individuals working or studying in China for more than one year – could purchase apartments for their own use.
The regulations have had some effect, but not nearly as much as was hoped.
From January to November, real estate developers in China [including players from Hong Kong, Macao and Taiwan] used $53.9 billion of foreign capital, 71.9% more than during the same stretch in 2006.
And domestic investments were already fanning the speculative flames. During that same period, slightly more than $435.4 billion [equal to 3.2 billion yuan] flowed into China's property sector from investors at home and abroad – an increase of 40.8% from the year before.
[China differentiates between foreign and domestic investors based largely on the currency deployed. Dollar-denominated investments are considered foreign investments, even if they originate from Hong Kong or Macao, both China territories. Yuan-denominated investments are viewed as domestic, even if they emanate from overseas. China, as is true of many Asian nations, has a huge global network of "Chinese" investors, some of whom are China-born citizens now living abroad, and others who are foreign-born Chinese who are relatives or colleagues of people still in China. Those overseas networks are a crucial element of the emergence of Asian countries as global economic powers].
Despite a tighter monetary policy – China's central bank boosted lending rates six times last year amid efforts to slow investment flows and rein the economy from a gallop to a trot – China's real estate climate index still advanced to 106.59 in November, up 0.85 points from October and up 2.67 points from November 2006.
However, the central government's focus will stay with affordable housing for low-income households. In November, it urged local authorities to reserve at least 70% of the land designated for residential construction for low-rent units or smaller, cheaper homes.
The inventory of unsold – but still marketable – buildings dropped 4.5% in November, falling to 117.97 million square meters. If property demand escalates, price escalations could steepen.
Analysts say the inventory decline could be the result of developers concentrating more on building affordable homes, and decreasing their focus on creating additional luxury properties. After all, the central government has been focusing on affordable housing for lower-income families. In fact, back in November, the government urged local authorities to reserve at least 70% of the land designated for residential construction for development of low-rent apartment-type units, or smaller, lower-priced houses.
[Editors Note: To see how you can obtain a free copy of Jim Rogers' latest bestseller, "A Bull in China: Investing Profitably in the World's Greatest Market," please click here.]
News and Related Story Links:
- China Radio International/CRIEnglish.com:
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.