Hot money hiking property prices?
By Jia Hepeng (Business Weekly)
Updated: 2004-12-02 14:37

International capital is rushing into China's booming property market, but industry analysts suggest it is unlikely to cause bubbles in the local real estate market.

"A growing number of foreign residents are choosing to buy properties in major Chinese cities, but whether their money can be defined as 'hot money' remains to be seen," said Harry Lu, vice-chairman of the 21st Century Real Estate (China) Co Ltd.

Hot money refers to floating international capital that seeks profits from speculative investments in currency exchanges, stock markets and/or properties.

Lu made the remarks last week, just a few days after Chinese media reported property prices in major Chinese cities -- most notably Shanghai -- have been pushed too high by speculating property investors from overseas.

Many overseas investors have placed their "hot money" in China, often in real estate, in anticipation that Chinese authorities will revalue the renminbi, the nation's currency, Beijing Business Today reported last week.

The newspaper quoted an unnamed property analyst as saying more than US$1 billion hot foreign money has flooded Shanghai's property market since October 28, when the People's Bank of China (PBOC), the nation's central bank, raised interest rates by 0.27 of a percentage point.

On October 28, PBOC raised the benchmark, one-year lending rate from 5.31 per cent to 5.58 per cent, and the one-year deposit rate from 1.98 per cent to 2.25 per cent.

Since the initial shock, China's real estate sector has coped with the hikes. Media across China are still reporting about booming housing sales, and local media have reported, in Shanghai, the average price of a riverside development has increased from 18,000 yuan (US$2,173.91) per square metre to 27,000 yuan (US$3,260.87).

Sales at the development took off in early November, after the interest rate hikes. The development's sales team have said more than half of the buyers have been foreign residents, Shanghai Morning Post has reported.

Beijing Daily reported last week that foreign currency mortgages, issued by branches of some foreign banks in Beijing, have grown rapidly in recent months.

Currently, foreign banks in China are permitted to lend money only to foreign residents.

Rising threat?

The interest rate hikes, which mean it will cost people more to repay their mortgages, should dampen people's desire to buy properties.

The fact real estate sales continue to boom in China indicates international capital, which is not reliant on mortgages from Chinese banks, is being injected into China's property market, Lu said.

Mei Xinyu, an analyst with the Chinese Academy of International Trade and Economic Co-operation (CAITEC), said, even though China does not open its capital market, foreign capital can still enter the country through false exports and fake foreign loans.

In the year's first nine months, China's cumulative foreign trade surplus was US$3.93 billion. In October, the month of the rate hikes, the monthly trade surplus increased suddenly to US$7.1 billion.

Mei suggested that was an indication of inflowing hot money from overseas.

The interest rate hikes place greater pressure on Chinese authorities to revalue the renminbi, as the currency's interest rate exceeds that of the US dollar, which will likely attract investors to buy the renminbi, Mei said.

Andy Xie, Morgan Stanley's chief economist for Asia-Pacific, says a hedge fund, worth at least US$1 trillion, might be waiting for the renminbi's appreciation.

Shanghai-based China Business News has quoted Xie as saying if the hot money currently invested in China's real estate market is used to buy renminbi, bubbles in the nation's real estate sector will burst.

That, Xie said, could result in a disaster.

National Bureau of Statistics' figures indicate, in the year's first 10 months, housing prices nationwide rose 11.7 per cent, year-on-year, to 2,758 yuan (US$333.09) per square metre.

Wang Xin, a senior employee with an international advertising company in Shanghai, said, even with his relatively high salary, he can hardly afford an apartment in the city, let alone most average workers.

Fewer impacts

Despite the possible inflow of hot money into China, property and money analysts suggest media and some foreign economists may exaggerate the effects on the local real estate market.

Lu said while the renminbi's possible appreciation is attractive to foreign property investors, most of the investors are more interested in achieving stable returns from their real estate investments.

"I know many foreign property buyers, mainly overseas Chinese, sell their US or UK properties to buy two or more apartments in Beijing or Shanghai," Lu said.

"They are optimistic about the long-term growth of China's real estate market, due to the robust Chinese economy. It is hard to say if their investments are creating bubbles."

Fulgence Kayiranga, research head at the Beijing branch of property consultant Chesterton International, said increasing investments from overseas are only one reason for the rising property prices.

Rising incomes and increasing demand for property are the main factors affecting property prices, Kayiranga said.

Yi Xianrong, deputy director of the Institute of Finance under the State Council's Development Research Centre, said additional hot money will not enter China's property market, as it only pursues quick returns.

In essence, Yi added, it takes too long to generate profits in the real estate market.

Responding to media reports about the hot money, Jiao Yang, a spokesperson for Shanghai's municipal government, told a news conference last week the hot money has not caused property prices in Shanghai to rise rapidly.

In fact, purchases of property by overseas residents accounted for about 5 per cent of the housing sales in Shanghai during the year's first 10 months.

That proportion, Jiao said, is reasonable.

Maggie Zhao, public relations manager at Shanghai developer Shui On Holdings, said few foreign buyers have purchased high-end properties developed by her firm.

Lu said although property investors from overseas might push up the overall housing price index, their purchases do not influence common housing projects.

Most property buyers from overseas only care about high-end products, such as villas and luxury apartments.

"There is no need to limit or control foreign investments in China's property market. To avoid the negative impacts, the government should help develop more affordable housing for local residents," Lu said.

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