China is tightening its grip once more on foreign investors in Chinese real estate, banning them from borrowing offshore in the latest effort to tame property prices and cool the economy.
The new rule, set out in a circular from the State Administration of Foreign Exchange, could squeeze foreign investors who take advantage of lower interest rates outside China.
Some may find it difficult to fund projects as the government has told its banks to cut back on loans for the construction industry. The central bank ordered Chinese banks to stop lending for land purchases as far back as 2003.
"The only alternative is to fund the entire equity," said Andrew McGinty, a partner at the law firm Lovells in Shanghai.
"But that's not a very favoured method, because your internal return on investment goes down dramatically."
Property funds operating in China tend to borrow to fund at least 50 percent of a project's value.
The circular, which the currency regulator sent to its local branches in early July but has not yet published on its Web site, also increases red-tape for foreign property investors.
Investors seeking to bring capital into China to set up a real estate company must now lodge documents with the Ministry of Commerce in Beijing -- not just with local branches of the ministry, according to the new circular with de facto effect from June 1.
That process could take a month or more, said an official at the Ministry of Commerce, declining to be identified.
"What we mean is very clear: First we are targeting foreign real estate firms that are illegally approved by local governments," a SAFE official said.
McGinty said the new rule would reduce foreign investment in the real estate sector, but the real impact would depend on how it is enforced.
China has applied a raft of measures to rein in property investment, including interest rate rises and rules to discourage construction of luxury homes.