The Ministry of Commerce and the State Administration of Foreign Exchange have jointly released the Circular on Further Strengthening and Regulating the Examination, Approval and Administration of Foreign Direct Investment in the Real Estate Market (Shang Zi Han [2007] No. 50) (the “Circular”) in May 2007, as a supporting regulation for the implementation of the Opinions on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market (Jian Zhu Fang [2006] No. 171) (the “Opinions”) issued by six ministries and departments under the State Council in July 2006. The Circular aims to strengthen and regulate the examination, approval and supervision on foreign direct investment in real estate market through the administration of foreign investment and foreign exchange. The key points of the Circular are as follows:
1. Establishment of the Principle of Project Company and Imposing Higher Requirement for Market Access for Foreign Investors
According to the Opinions, the principles of commercial existence shall be observed by foreign investors when they invest in non-self use real estate. The Circular has further specified the contents of the principles of commercial existence, i.e. prior to the application for the establishment of a real estate company, the land use right and ownership of buildings shall be obtained, or a preliminary transfer/purchase agreement for land use right or property right of real estate shall be entered into. In the event that any foreign-funded enterprise plans to expand its business scope to include real estate development or operation, or any foreign-funded enterprise plans to engage in new project of real estate development and operation, it shall file to examination and approval authority for expansion of business scope or business scale in accordance with relevant laws and regulations on foreign investment. Imposing higher requirement for market access for foreign investors aims to encourage long-term investment and restrain short-term speculation.
2. Domestic Real Estate Enterprises Encounter More Difficulties in Obtaining Financing
The Circular stipulates that the acquisition of or investment in domestic real estate enterprises by ways of round-trip investment will be under strict control. The act of changing actual controller of domestic real estate enterprises for the purpose of evading examination on foreign investment in real estate will be prohibited. In the meantime, foreign investment in high-end real estate will also be under strict control. All above stipulations make it more difficult for domestic real estate enterprises to obtain overseas finance, and to use foreign capital by way of equity sales.
3. Prohibition of Disguised Financing
The Circular emphasizes that neither the Chinese party nor the foreign party in a foreign-funded real estate enterprise may stipulate any term on fixed return or disguised fixed return in any contract in any form. Foreign investment may not access the market in the form of disguised financing; disguisedly usurious loan is strictly prohibited. In some secondary and tertiary cities in China, it is a usual practice to use land and the commitment for return as an attraction for foreign investment for short-term interest. This kind of disguisedly usurious loan is of great potential risk.
4. Filing Requirement with the Ministry of Commerce
The filing requirement with the Ministry of Commerce is added to the procedures of the establishment of foreign-funded real estate enterprises pursuant to the Circular. According to the filing requirement, local examination and approval authority shall file for record to the Ministry of Commerce on a timely basis when examining the establishment of foreign-funded real estate enterprise. The Ministry of Commerce will take investigative and correct any irregular approval of foreign-funded real estate enterprise by local authority which the foreign exchange authority shall refuse granting foreign exchange registration and other formalities to any foreign-invested real property irregularly established.