Lifting FDI restrictions on real estate… slowly
December 18, 2015 | BY
Katherine JoChina has taken careful steps to streamline regulations and ease burdens for foreign investors in real estate by relaxing requirements for equity ratios, loans, individual property purchases and FX registration, but many restrictions remain
On August 19 2015, six state authorities in China jointly released the Circular on Revising Relevant Policy on the Entry of Foreign Investment into the Real Property Market and the Administration Thereof (关于调整房地产市场外资准入和管理有关政策的通知) (Circular 122). It came at a time when the Chinese economy was slowing, as was foreign investment in the real estate market. According to a Dow Jones report, investment in real estate development in China during the first 10 months of this year rose by 2.0% – the slowest rate of increase since the start of 2009.
Circular 122 aims to ease existing restrictions imposed upon foreign investors by a series of regulations promulgated after the Opinions on Regulating the Entry of Foreign Investment into the Real Property Market and the Administration Thereof (关于规范房地产市场外资准入和管理的意见) (Opinions) in 2006. By lifting these barriers, Circular 122 signals the government's intention to encourage foreign capital inflow to boost the domestic real estate market, which plays a critical role in the Chinese economy and has provided great momentum to the country's growth.
|Circular 122: Relaxing away
Since the Opinions, the government has restricted the formation, operation and financing of foreign-invested real estate enterprises (FIREEs) in order to cool down the then “overheated” market.
The 2015 Foreign Investment Industrial Guidance Catalogue, promulgated by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) in March 2015, however, marked a turning point for the deregulation of FIREEs at the national level. For the first time since 2006, the government lifted most types of foreign-invested real estate businesses from the “restricted” category to “permitted”.
Circular 122 highlights this trend. But it only modifies certain provisions of the Opinions, meaning that restrictions still remain.
Reduced equity ratio requirements
Before the Opinions, FIREEs and other foreign-invested enterprises (FIEs) in China were subject to the same equity ratio requirements (the ratio between the registered capital and the total investment amounts), as set by the Tentative Provisions on the Sino-foreign Equity Joint Ventures Ratio of Registered Capital to Total Investment (关于中外合资经营企业注册资本与投资总额比例的暂行规定) (Equity Ratio Provisions). The Opinions, along with their implementing rules, introduced a more stringent set of requirements for FIREEs. Circular 122 has cancelled this. FIREEs are now entitled to receive equal treatment as other FIEs in terms of equity ratios and are able to achieve higher leverage ratios.
Set forth below are the different requirements on equity ratio set by the 2006 Opinions and the Equity Ratio Provisions.
The Opinions:
| Total investment amount (US$) | Equity ratio |
| $3 million or less | At least 70% |
| Between $3 million and $10 million | At least 50% |
| Above $10 million | At least 50% |
The Equity Ratio Provisions:
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