China is right to extend a warmer welcome to foreign investment

Victor Fung says amid a slowdown, Beijing's easing of restrictions on foreign investment could be extended from property to other sectors

PUBLISHED : Thursday, 03 September, 2015, 10:46am
UPDATED : Thursday, 03 September, 2015, 10:46am

China announced last week that it has relaxed the rules for foreigners investing in its weakening property market. The move is timely in arresting declining prices.

As many Chinese stock investors face margin calls (the Shanghai A-share index has dropped to the 3,000 level from 5,000 just a month ago), some are having to sell their property holdings to raise cash. If the property market suffers a rout, Beijing leaders might find themselves in hot water.

Last week, six Chinese ministries - including the People's Bank of China - issued a statement scrapping rules requiring foreign investors to pay to the authorities the full amount of registered capital for their mainland entities before they could take out any property loans. Without a loan, most people - Chinese or foreigners - can't afford to buy a flat or an office.

Foreigners can now also buy more than one apartment. The previous rule was designed to nip any speculation in the bud. Moreover, the previous requirement that foreigners had to live in China for at least a year has been scrapped. These are all positive measures that will boost demand and stabilise the property market.

These are all positive measures that will boost demand and stabilise the property market

In July, 29 of the mainland's 70 cities reported falls in property prices. Shenzhen Daily reported that, since the end of July, some investors there had put their properties up for sale at a 3-5 per cent discount on prevailing market prices. Some may be needing cash quickly to cover their stock market losses.

Leaders in Beijing also hope that the move will help to stem outflows of foreign capital, which have been growing due to the fall in the renminbi's value. The decline has also been exacerbated by the central bank's decision to cut interest rates last week.

Given that the mainland's economy is closely entwined with the global economy, Chinese leaders would be well advised to take further steps to encourage foreign investment in the economy, from manufacturing to banking and finance.

The growth in foreign direct investment has slowed in recent years in China, owing to, among other things, rising costs, competition from Southeast Asian countries - including Vietnam - and concerns over official investigations into foreign companies.

Foreign direct investment in mainland China stood at US$119.6 billion last year, a meagre increase of just 1.7 per cent from a year earlier.

Chinese leaders should be lauded for their moves to relax the rules on foreign investors in the property market. If anything, it shows they realise that foreigners can play a role in helping the stumbling Chinese economy to recover.

Victor Fung is an adjunct professor at Hong Kong Shue Yan University