If you walked into any foreign bank in Shanghai last year, you would see staff busily advising clients on how to get a mortgage. The booming Shanghai market has attracted enormous foreign interest and brought great business to foreign banks doing property finance. However, the sentiment is soon to turn sour this year, as the government is sending signals that regulators will be targeting foreigners and foreign banks in a high-profile bid to cool the overheated market. In the past three weeks, the People's Bank of China and the China Banking Regulatory Commission have been releasing figures and warnings on overseas capital's negative role in raising property prices. China is looking for a scapegoat to blame for the Shanghai property bubble - and foreign investors make an easy target. The blame game will have repercussions not only on small individual buyers but also institutional investors who have set up funds to invest in Shanghai property. Central bank statistics show the ratio of foreign capital flowing into property rose from 16.1 per cent in 2001 to 23.5 per cent in 2002, 25.4 per cent in 2003 and 32.6 per cent in the first five months of last year. Foreign capital accounted for 23.21 per cent of property purchases in Shanghai in May last year, up from 8.29 per cent in the first quarter of 2003 and 15 per cent in the last quarter of 2003. Figures from the CBRC's Shanghai branch point to the same rising trend. At the end of last year, outstanding foreign currency loans of foreign banks in the city reached US$12.5 billion, up US$4.47 billion from a year earlier and more than double the US$1.58 billion increase in 2003, with the fastest rise in the final half of last year. Shanghai's local banks, meanwhile, had an outstanding balance of foreign currency loans of US$13.2 billion at the end of last year, up a smaller US$1.43 billion from a year earlier. It is not known how many of these foreign exchange loans went to the property sector, but the message is clear: the foreign banks have been given a longer leash, are less subject to policy control by Beijing than domestic banks, and can offer foreign exchange loans at rates lower than for yuan. The blame game began in earnest on March 5 when Prime Minister Wen Jiabao said in his annual work report the government's priority was to slow the excessive rise in property prices. Everyone in the audience knew he was referring to Shanghai. One of the most important reasons for this boom has been a flood of overseas money, principally from Hong Kong, Taiwan, Singapore, overseas Chinese in Southeast Asia and, to an extent, Europe and North America. Most of this money has gone into properties in central areas such as Luwan, Huangpu and Jingan, costing between two million and 10 million yuan, boosting prices there by more than 20 per cent last year, according to official figures, and up to 50 per cent, according to unofficial estimates. The money has come from individuals, housing funds and investment funds using their own cash, bank mortgages and the grey market, where interest rates reached 20 per cent last summer in Shanghai. The strongest attack on the foreigners came on March 10, when Guo Shuqing, then director of the State Administration of Foreign Exchange, said that since the start of last year foreign capital had been speculating in the market, driving up prices and bringing enormous risk to financial institutions, companies and individuals. He said that the authorities were investigating this flood of money and would deal severely with cases of irregularities. What Mr Guo was most concerned about were the growing leakages to China's tightly controlled foreign-exchange regime by property. To avoid restrictions, investors register the money for trading or manufacturing investment use, enabling them to repatriate profits more easily. Taiwanese, who run thousands of factories, restaurants and other businesses in Shanghai and east Shanghai, have more channels for finance than others. After selling property at a profit, many investors use unofficial channels to take their money out of China, such as underground banks, to avoid the cumbersome procedures for official repatriation. The Shanghai government is in a bind. It needs foreign capital to keep coming in to sustain the property boom. The sector has become a pillar of the city's economy, making up 8.4 per cent of its gross domestic product last year, up from 0.5 per cent in 1990. The nightmare for Shanghai is that the flood of cash over the past 18 months will leave as quickly as it came. The city still has memories of the pain of the last property slump in the mid-1990s. So far, Beijing has been content to raise the interest rate on a home loan with a five-year maturity to 5.51 per cent from 5.31 per cent as of March 17, and push the city to enact the 5.5 per cent capital gains tax on properties sold within 12 months. However, if these measures do not succeed in pushing down the rate of increase to a level Beijing finds acceptable, further steps will follow, of which a rise in the tax is the most likely, as it is the one that targets speculators most directly. A closer look at the foreign lenders' loan books will also be on the cards. Foreign investors are hoping that the blame game will not focus on them, as the problem is largely home-grown.