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Abstract Real Estate Industry (REI) is very important in China economic development which relates to people benefit, entrepreneur development and country safe.REI relates with many industries and develops into one of major industry. (Figure 1) Development of China REI on the one hand lacks of funds and exists on the need for foreign capital; on the other hand, the existence of international hot money ensures adequate space for foreign capital to stay into. With China's accession to WTO, it gradually increases the degree of opening up in REI, its opportunities and challenges both exist. REI is considered as China's last violent industry in many institutions and individuals eyes. Therefore, foreign investors have accelerated efforts to develop China REI. (Figure 2) However, the inflow of foreign capital is a double-edged sword and has both positive and negative effects existing. To REI, many research in foreign investment has been done, the research of foreign investment in Real Estate has been rarely done. REI has become more and more important in China, so it is necessary to make a research on this subject. All the paper is divided into five chapters. The first chapter introduces the background, content and ideas, purpose and significance of the research. Chapter Two is foreign investment real estate outlined covering foreign investment in China real estate situation, characteristics and forms. Chapter Three analyses the causes why foreign capital entering China REI from the macro and micro aspects. Chapter Four is that foreign investment impact on China real estate development from both positive and negative aspects is discussed. Finally, on the use of foreign investment situation, it suggests the development measures of China real estate.

Keywords: foreign investment; Real estate; Countermeasures

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Catalogue Abstract 1 List of figure .5 Acknowledgements 6 Chapter 1: Introduction ..7 1.1 The background and significance of the topic .7 1.1.1. The background of topics ...7 1.1.2. The significance of topics ...9 1.1.3. The hypothesis and goals of the topic 11 1.2. Literature review 11 1.2.1. The theory on real estate industry ...11 1.2.2. The domestic (China) and foreign research on this topic 14 1.3. The research ideas and methods ...17 1.3.1. Research ideas ..17 1.3.2. Research methods ....18 Chapter 2: The overview of foreign investment in China real estate industry ..20 2.1. The status of foreign investment in China REI 20 2.2. The characteristics of foreign investment in China REI .22 2.2.1. The source of investment is mainly on Chinese capital .23 2.2.2. The investment objectives expand in the low-end properties 24 2.2.3. The operation of foreign investment capital reveals

advantages ..............................................................................................25 2.2.4. The entry of foreign investment in China REM promotes the development of the relevant market ..26 2.2.5. The access of foreign investors enhances the international level of Chinese enterprises .27 2.3. The form of foreign investment in China REI 28 2.3.1. Direct investment in China REM .28
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2.3.2. Using external debt and financing to enter the China REI . 29 2.3.3. Individuals or foreign institutions investing in REI ....30 Chapter 3: The motivations of foreign investment in China real estate industry ..32 3.1. The analysis from the macro-level .32 3.1.1. China's sustained and steady economic growth ..33 3.1.2. The demand and high investment rate of return in China REM.34 3.1.3. The orders of REM gradually regulate ...35 3.1.4. Beijing 2008 Olympic Games has promoted China REI ..36 3.1.5. The expected appreciation of RMB 37 3.2. The analysis from the micro-level ..37 3.2.1. The requirements for allocation of foreign funds ..38 3.2.2. Avoid exchange rate risk, capital maintenance and

appreciation39 3.2.3. Use different interest rates, lower investment costs .39 3.2.4. Access to the arbitrage from housing price rising .39 Chapter 4: The impacts of foreign investment to China real estate industry development ..39 4.1. The positive impacts .41 4.1.1. Update the investment philosophy ..41 4.1.2. Improve the capital structure of enterprises ..41 4.1.3. Enhance the operation and management level 42 4.1.4. Promote China REI to gear to the international conventions .42 4.1.5. Make up for shortage of funds .43 4.2. The negative effects .43 4.2.1. Affect living standards of ordinary people in China ..43 4.2.2. Not conducive to market stability 44 4.2.3. The impact to financial system and the real estate enterprises .44 4.2.4. Enhance the market risk of REI ..46 4.2.5. The weakening issue of the subject status 46
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4.2.6. Squeeze the profit margins of local enterprises in China REM ..47 Chapter 5: The recommendations for China using foreign investment in real estate industry ...49 5.1. The roles of China Government ....................................................49 5.1.1. Improve and perfect the existing laws and regulations ...49 5.1.2. Strengthen monitoring of foreign investment entry into REI ...50 5.1.3. Positively develop Real Estate Investment Trusts (REITS) ....54 5.1.4. Industriously promote the securitization of REM ..57 5.2. The measures taken inside real estate industry ..62 5.2.1. The learning effect .63 5.2.2. The cooperative effect ..63 5.2.3. The demonstration effect .63 5.2.4. The force effect ..64 5.2.5. The improvement effect 64 Chapter 6: Conclusion .66 Figure .68 Reference ..72

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List of figure 1. Contribution of REI development of GDP in China, 1998 2007 2. Real estate investment and annual growth rate, 1986-2007 3. Monthly foreign investment in China REI, 2008 2009 (REM: billion) 4. Number of newly approved foreign invested companies, 2005-2009 5. The net income in real estate in Chinese major regions in China in 2001 6. The house prices change from Nov. 2008 to Feb. 2010 7. The bubble in China REI, 2001-2010 8. Real estate securities total return index movement, 1995-2009

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Acknowledgements This thesis would not have been possible without the contributions off several people. To all of these people, I wish to express my gratitude. First and foremost, I would like to acknowledge and extend my heartfelt gratitude to my supervisorMr. Tony Boczko, for his vital encouragement and patient guidance, generous assistance and invaluable advice, all of which have been of inestimable worth to the completion of my thesis. Secondly, my special thanks go to all people have helped and taught me immensely during the one years of my study in University of Hull. And I would also like to thank all the classmates and friends who have given me generous support and helpful advice during the past years. They have provided me great help and comprehensive supervision through the four years. I have benefited a great deal from their advice and suggestions. The last but not least, my thanks would also go to my beloved parents for their boundless love and whole-hearted support over all these past years.

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Chapter1: Introduction 1.1. The background and significance of the topic 1.1.1. The background of topics First, the processes of foreign investment entering into China REI are speeding up. According to China commitments in the construction field after joined into WTO: in the REI, in addition to high-end real estate projects (luxury hotels, luxury apartments, golf courses etc.) are not allowed foreign-owned, the other real estate projects are not limited; in the intermediary services of REI, including real estate valuation, property management, intermediary services etc., it is allowed a foreign joint venture or cooperative enterprise, and foreign investment will be allowed to set up wholly owned enterprises in 5 years. Taking this opportunity, foreign investors all think highly of

China real estate market (REM) which develops rapidly. (Figure 3) So, they bring a strong "Foreign investment whirlwind" into China REM once again. In recent years, China strengthens macro-control in REM, carrying out the reform into related fields of REI, such as land use, land finance, which makes the occasion for foreign capital entering into China REI tend to be mature. (Li Dongyang, 2002) Foreign investors seize the rarely historic opportunity, through a variety of ways to speed up the pace to enter China REM. (Cao Zhenliang, 2003)) Second, in China, domestic house price increase highly Huge investment potential in China domestic REI has attracted many foreign institutions to enter, and actively investing activities become more and more evident. Measuring by absolute level or relative level (such as housing price-income ratio), the current price levels of China REM has
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been already too high. Large-scale entry of foreign capital also further push up house prices from two directions: first, the entry of foreign investment increases money supply in REM, and directly contributes to pushing up housing prices. According to the 2007 latest data which was

released by the National Development and Reform Commission (NDRC), in August 2007, the rises of housing prices in China major cities broke through 8% which were the first time in the history. In 70 cities nationwide, the year-on-year rises of housing sales price were 8.2% and 0.7% higher than the previous month; the month-on-month increases were 1.4%, and 0.2 % higher than the previous month. Since the national house prices got the historically high record in June 2007, this was the second month-refresh record. According to the statistics, in June the year-on-year rises of house prices were 7.1% which got the highest record since NDRC has started monthly statistics; in July the year-on-year increases of house prices were 7.5% which broke the high record just set in June; in August the year-on-year rises of house prices were 8.2%, once again refreshed the historically highest rise. Second, the house-purchasing behavior of foreign institutional and individuals in China domestic REM makes a clear "benchmark effect". Many domestic private capitals are affected to chase into the market, which indirectly promotes the domestic real estate prices to continually rise. Third, the effectiveness of the governments regulations in the REI is not obvious In order to effectively control the foreign hot money to enter China REM, and ensure the domestic REM to receive stable and healthy development, the Six Ministries jointly issued the " Regulating the Access to and

The year-on-year rises of house prices in Shanghai were 3.6%. http://sh.xmnext.com/minsheng/2007/09/20/895907.html. 2007-09-20. The Ministry of Construction, the Ministry of Commerce, National Development and Reform Commission, the People's Bank of China, the State Administration of Industry and Commerce and the State

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Administration of Foreign Investment in the REM " (the construction of housing [ 2006] NO.171) in July 2006. Subsequently, the State Administration of Foreign Exchange and Ministry of Construction issued the "Relevant Issues Concerning Normalizing the Administration of Foreign Exchange in REM" (Development Principles Group [2006] NO.47) in September 2006. The introduction of these two documents was an important measure that China strengthens macro-control to ensure the healthy and orderly development of the domestic REM. However, from the house price levels in 2007, the document introduced by the Government could not form an effectively control to house prices. Until February 2007, the investments from Morgan Stanley Real Estate Fund, Cheung Kong and Hutchison Whampoa, Merrill Lynch International, the U.S. private equity Jinhua Ping Group etc., which invest into the China REM, have reached 4.2 billion RMB. China many policies and regulations on restricting foreign acquisition of REI have not played a substantial role. 1.1.2. The significance of topics At present, there is a structural imbalance between supply and demand in China REM, high-end residences and commercial property are excessive, ad affordable housings are much less; this phenomenon is in particular serious in Beijing, Shanghai, Shenzhen and other large cities. For the motivation of pursuing profits, liquidity, management facilitation etc., and because in these many years, the system of sale-housing outward in China artificially limits the objects of foreign institutions and individuals who purchase real estate into the high-grade project. It makes the increasing demand for high-grade properties, and further exacerbates the

Administration of Foreign Exchange. http://www.transipo.com/show.asp?id=327 Gao Liang, 2007. The data of the situation of M&A and controls by foreign investment to China enterprises http://www.wyzxsx.com/Article/Class16/200706/20334.html . 2007-6-27..

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situation of supply and demand imbalances in the low and middle-grade house market. The REI has directly affected more than 50 industries, the rise of house prices will be locally driven economic overheating. Meanwhile, the rise in house prices means that consumer assets increase bit to format the wealth effect and increase consumer demand, and

further stimulate the economy overheating. Once the international hot money has achieved their goals, it will exit China REM, and cause real estate prices plummet, and then make the economy in a depression. House prices falling sharply also makes consumers assets shrink to cause consumer retrenchment, thus accelerates the economic downturn, and makes sharp fluctuations in house prices and the national economy. For any country, development should finally rely on their efforts. The purpose of capital is value-added, so foreign investment invests in China REI just to grab for more profits. The use of any foreign investment has its cost concept. For example, when China uses the foreign capital, the government will give more tax incentives to attract foreign capital inflowing, so this will undoubtedly result in the loss of domestic revenue. Any use of foreign capital is only to constantly enhance and improve the autonomy capability. As China REM continues to boom, the high expectations of RMB appreciation and the Chinese government's macro-control to REM, all these make capital scarcer in the REI. It results in strong supply and demand of foreign capital in REM, and the participation of foreign investment in China real estate is rising. How to ensure that full utilizing

foreign capital while maintaining China REM run independently and robustly, which has been one of the points in the foreign investment management in REI. (Lu Jinyong, 2004) Therefore, analyzing status and reasons of foreign investment in China REI and correctly grasping its impact on Chins REI. This action facilitates to timely set down foreign investment management policies and reduces the negative impact of
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foreign investment, in order to ensure the healthy development of China REI. 1.1.3. The hypothesis and goals of the topic Foreign investments entering China REI has two sides, but this paper points that if the Chinese government can formulate and adopt suitable policy measures and use foreign investments to bring benefits to China REM, which will be necessary to products a number of advantages for China REI. At the same time, inside the REI, Chinese real estate enterprises and the related enterprises, also should improve themselves and advance with the times, and run neck and neck with foreign investors to help each other and get profits, so which will get more healthy and steady development in REI. As a result, this paper will analysis in three aspects: the overview of foreign investment in China REI, the motivations of foreign investment in China REI and the impacts of foreign investment for China REI development, and finally gives the recommendations for China REI using foreign investment, which come within two aspects: the roles of China Government and the measures taken inside REI. 1.2. Literature review 1.2.1. The theory on REI Existing research in international REI appeared after 1980s, and so far there have been not many results. In these literatures, some from the perspective of cross-border portfolio investment investigate the real estate movement, and some make interpretation from the perspective of the principle of expected returns. In addition, there also has been FDI theory, especially Dunning's eclectic theory , which explains the cross-border

Dunning, 1977. Trade Location of Economic Activities and the MNE A Search for an Eclectic Approach.

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REI. First, the principle of expected returns and the international REI The principle of expected return considers that interest rate difference is the motivation of international capital flows; capital-seeking nature will make capital from countries with low interest rates to countries with high flow rates. Later, it extends to the result of the difference of the capital return is the fundamental cause of capital flows. This theory suggests that foreign REI is motivated by the pursuit of higher yields. As the national

real estate yields are different in different countries, but the ultimate motive of the investors is the pursuit of high returns; therefore, this theory can explain cross-border REI to some extent. (Herry J. & Martin D, 1997) But the principle of expected returns cannot fully explain the motives of foreign REI. The yield rate of REI in different countries is not the same, but investors cannot simply consider the rate of return, regardless of cross-border REI risks. In particular, due to real estate products are different from general merchandise; because it should invest a great capital generally in real estate, high entry costs, poor liquidity, and market limitations in the unfamiliar environment. Second, the portfolio theory and international REI The scholars who support the portfolio theory consider that the motive of international REI is to spread the investment risks and improve the investment portfolio. This theory has certain rationality. It takes into account the risk factors, avoiding the limitations of the principle of expected returns in this regard. Investors can achieve the substitution between risk and return by investing in a portfolio. Through the portfolio investment assets in different countries, investors can reduce risk by not reducing the income situation, actually increase revenue. Sometimes this
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cross-border excess earning is very important, especially for institutional investors. Moreover, for cross-border REI, sometimes the explanatory power of internalization advantages and business advantages is not strong, and some investors will focus on the benefits from the portfolio. (Chen Xushen, 2001) But the portfolio theory still has some limitations to explain completely the cross-border real estate. Risk Diversification of risks is not the only motive of cross-border REI. From the relationship between the relevance and cross-border REI, very often, among countries with high correlation, the cross-border REIs are larger-scale. Besides, non-institutional investors often do not all make investment decision from the perspective of spread risk. Actually, from the research methods, the starting point is that often whether put foreign real estate into the portfolio could bring the investors extra income. Say strictly, based on this research of starting could not judge whether the cross-border REI has decentralization character, because the study often mixes investors all risks, advantages and diversify interests together, and no separate to discuss. So the decentralization benefits from transnational REI may be caused by other advantages. Third, FDI theory and international REI The mainstream theory of FDI is mainly internalization advantage theory and regional advantage theory. Internalization advantages (Cha Yingsheng, 2005)

Internalization advantages consider that multinational enterprises through organization can reduce market transaction costs, to benefit by insider
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trading, and effectively avoid the tariff barriers and government intervention; and it can to avoid the risk of loss technology caused by technology transfer. Internalization advantage is the motive of general

industrial manufacturing companies to conduct cross-border investment. For cross-border REI enterprises, technology is not obvious, so is difficult to create internalized motivation. The multinational enterprises which internalize for reduce transaction costs generally can form an industrial chain for multi-use to their domestic enterprises. This industrial chain can make the original external transactions internalizing, such multinational companies are generally incorporated into global strategy of transnational corporations, and service this strategy. Location specific advantages

The location advantages refer to specific advantages of the host country, embodied in the element investigating, political system, policies and regulations, market environment, geographic location and ideological and cultural advantages etc. The international investors should think of the location factors when choose the invested country. Such as land supply, the investors will consider land prices, land acquisition convenience, geographic location; in market analysis, the investors will choose the countries and regions with good market prospects, such as high demand, active trading, high income, and also the limitations of the market; on the investment environment, especially the macroeconomic environment, political environment, investors pay greater attention. 1.2.2. The domestic (China) and foreign research on this topic At present, there are many writings of the research on investment and real estate subentry, but the writings for the issue on the development of foreign investment and China real estate are not many. From the existing
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papers, there are mainly in the following respects. First, legal issues of foreign investment in China REI Ping Pin (2006), in an article Legal thinking on the development of foreign investment in real estate ", from a legal point of view she puts forward some solutions to the problems of China foreign investment in China REI. Second, the accounting treatment of foreign investment in China REI Shi Jianzhong (2004) "Accounting treatment of prepaid corporate income tax for foreign investors investing in real estate development company", Guo Zhengming (2003) "The discussion about tax-related issues for club" when foreign investors investing in real estate development company", Xia Youchun (2006) "Questions of the tax treatment expenses during the period of foreign investors investing in real estate development business", all the above books discuss the issues of accounting treatment on revenue. By entry into force of the new accounting standards, the accounting aspects of foreign investors investing in the real estate are different from the past, mainly in handling issues of corporate tax. Li Ming (2006) the comparison of new and old accounting treatment and tax-related impact analysis in Foreign Investment Enterprises investing in real estate", this book analyzes the impact on tax-related action. Third, the motivations of foreign investment in China REI On the issue of the motivations for foreign investors investing in China REI, all kinds of literature have discussed relatively frequently. In "the motivation of foreign Investors investing in Chinese Mainland REI", Li Wenbin (2004) considers that the major motive of cross-border real estate investment is to expand market opportunities, pursue high returns, diversify risks, which should be the main reasons for foreign investment in
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China real estate, and conducted a detailed analysis of these reasons. Fourth, the pros and cons and the impact of foreign investment in China REI There is no doubt that foreign investment in China real estate can make up for lack of funds for construction in China, promoting China economic growth, but there are also some disadvantages. Thus, some domestic scholars have analyzed some adverse effects. Yin Zhongli (2006), in the book of "Why restrict foreign investment in China REI", analyzes and discusses the reasons and countermeasures for limitation on a certain degree. Fifth, the relationship between real estate prices changing and foreign capital entering There are many researches on the relations between real estate prices and foreign investment; hereinto, Wang XiuLing (2005) analyzes the limitation policy to foreign investment in China and the pros and cons of foreign capital entering China REI. Ren BoHu (2006) describes the changing structure of foreign investment in China REM, and analyzes the causes of the changes also discusses many aspects of impacts to China economic development by foreign investment. Wang ChengHao etc. (2007) analyze the present situation of foreign capital flow and its effect to REM in China, and by using the statistical data of REM make future projections on the utilization of foreign capital in China. Li YanHong (2008) analyzes the ways and changing trends of the overseas capital inflows in China REM, and then puts forward some policy suggestions. Wen Bin (2009) analyzes the international balance of payments and the relationship between foreign investment and domestic investment in REM by empirical analyses; he think the both two items is the main causes of
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real estate investment keeping too hot, and puts forward the policy suggestions on adjusting RMB exchange rate policy and guiding foreign investment trends to promote development in REI. 1.3. The research ideas and methods 1.3.1. Research ideas As a branch of foreign investment, foreign investors investing in real estate has played a very important role to China real estate development and even the national economy since the reform and opening up. However, among the foreign investment theories, the major theories that place in the leading position and bring wide influence are including monopoly advantage theory, product life cycle theory, internalization theory, comparative advantage theory and eclectic theory of international production etc. These theories mostly choose general industrial and services production as the investigating objects, and there are few specific research involving in cross-border investment behavior in REI. The traditional REI theory in particular rarely talked about cross-border REI. This paper, try to base on the theory; first of all, through the economic situation in China and abroad in these years, and the condition analysis of China REI, I will analyze and make a conclusion of the motivations of the foreign investment in China REI. View from the macro-environment: first, China economy grow sustainably and steadily; second, demands and returns on investment of China REM; Third, the REM orders tend to gradually regulate; fourth, the promotion of Beijing 2008 Olympic Games on real estate; fifth, the RMB appreciation expectations. From the micro-level analysis: first, foreign-investment requirements; second, avoid exchange rate risk, capital maintenance and appreciation; third, use differences in interest rates, lower investment costs; fourth, access the
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arbitrage space of house price rise. Secondly, based on the analysis of current situations and reasons of foreign investment in China REI, this paper analyze the impact of foreign investment to China REI from both positive and negative aspects. On the positive impacts, including: update idea of investment and market operation, improve the capital structure for enterprises, enhance the management level, promote the domestic REI to get international standards and make up for shortage of funds etc.; the negative impacts are mainly the following aspects: impact the growth in the living standard of Chinese ordinary people, and threaten market stability, and cause the shock to the financial system and REM, also enhance the REM risks, the problem of weakening main status, and squeeze the profit margins of local businesses. Finally, directing at the negative impact from foreign investment in China REI to China and the actual situation of China real estate development, this paper points out that China must improve and perfect existing laws and regulations, strengthen the monitoring of foreign investment in real estate. In order to strengthen the autonomy in the use of foreign capital and make up for lack of funds, this paper raise that it should be actively developing REI trust, and efforts to promote the securitization of REM. The healthy development of China real estate is not just rely on the government to promote the improvement of the external environment, at the same time, businesses inside REI need to through the learning effect, co-effect, forced effect, demonstration effect, and self-improvement effect enhance self-determination capacity, thus to promote the healthy development of the domestic REI. 1.3.2. Research methods

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1 The combining method of theories and practices. In the thesis writing

process, I always maintain to combine the investment theory and specific conditions of foreign investment in China REI and operation situation of China REI itself together.
2 The method of literature research. In the course of the study, in order to

more fully explain the problem, I pay attention to absorb the predecessors research critically, discard the dross and select the essential, eliminate the false and retain the true. This paper needs to present and analyze the development and current situation of foreign investment in China REI by using literature and data to give out the relevant solutions.
3 The method of comparative analysis. The price fluctuations of real

estate can be reflected only by comparison, therefore, methods of comparative analysis should be used in this article.
4 The combining method of qualitative analysis and quantitative analysis.

This paper totally uses induction and deduction, analysis and synthesis, abstraction and generalization and some other methods, and then processes all the achieved data by thinking from the outside to inside, to see the truth of foreign investment in China REI and reveal the inherent law and give appropriate advice. Meanwhile, it also uses numerical data analysis to more accurately understand the status of foreign investment in China REI, more scientifically reveal the laws, grasp the essence and clear relations, which helps to predict the trends of the development of foreign investment in China REI.

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Chapter 2: The overview of foreign investment in China REI The starting of China REI and foreign investors investing in China REI is late; the data statistics of REI actually using foreign investment has not been started until 1994. Compared with vigorous international foreign real estate investment, how is China's situation? The following, I will analyze the foreign investment in REI from the status, characteristics and forms. 2.1. The status of foreign investment in China REI Since reform and opening, China absorbing foreign investment has made remarkable achievements. Along with the abolition of the housing allotment system, the real estate as a commodity formally went into market operation, and the current real estate has become an important area of absorbing foreign investment in China. September 12, 2005, the State Administration of Foreign Exchange (SAFE) for the first time disclosed that foreign investment in China REM took about 75% in the investment ratio. In "Report of the balance of payments in the first half of 2006" which offered by the balance of Payments Analysis Group of the SAFE, it referred that in the first half of 2006 the new foreign real estate enterprises were 1180, the year-on-year rise was up to 25.04%; the amount of contracted foreign capital was 12.852 billion USD, up 55.04 percent; the actual use of foreign investment 3.22 billion U.S. dollars, the year-on-year rise was up 27.89%. Correspondingly, the REI in the first half of 2007 added foreign debt was 17.35 billion USD; the year-on-year rise was 203.32%. As of the end of June 2006, the ratio of foreign real estate debt took 92.13% of total newly external debt in REI, the total external debt in foreign REI tended to increase year by year. In the first half of 2007, China's total foreign investment was 28.229 billion RMB, the

Group of analyzing balance of payments in SAFE. Report of balance of payments in the first half of 2006 [M]. 6 October, 2007. Page: 36.

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year-on-year rise 67.8% to the last year 167.29 billion RMB. Morgan Stanley, ING Group, Merrill Lynch, Macquarie, Temasek, Standard Chartered, Citigroup Asia, Rockefeller, Singapore Metro Hldg and Jebsen etc., these top investing institutions that summon wind and rain in the

international market, now have all happened to coincide to appear in China REM, and made extraordinary opinion. (Figure 4) The data from State Statistical Bureau showed that the amount of money of foreign institutions in 2005 buying buildings in China was up to 3.4 billion USD, and created the sum of previous 5 years. Moreover, the growing trend of this geometric progression has been continuously enlarged after 2006, according to the research results from one of the world's largest property consultancy CB Richard Ellis projected that the first two quarters of 2007, at least 10 billion USD of foreign funds would invest in the mainland of China REM. The total settlement funds of foreign institutions and individuals purchasing commercial housing also grew more than 2 times as last year. The international real estate funds that leading by Morgan Stanley, Citigroup as the main members became the vanguard who entered into China REM. During 2001 to 2005, the Morgan Stanley has invested total 1.5 billion USD in China REM, and in 2006 the company put additional investment 3 billion USD. Followed by Morgan Stanley, Citigroup increased investment in mainland of China REM for more than 9 times during 2007 to 2009; the maximum was to 800 million USD. In addition, the Dutch ING Bank, Merrill Lynch International and other world-renowned companies have publicly announced that they would carry large amount of money and deeply involved in China REM. At the same time, investing institutions in Asia are also have fast accessed

Data Provider: Real Estate Department in Fixed Assets Statistics Division in National Bureau of Statistics. Ma guipeng & Wang Song, 2009. The thinking behind foreign capital poured into the real estate market. Journal of China Real Estate Finance. 2009- (10). Page: 24.

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into China REM. Data showed that in 2005, there were 26 billion USD investing in Asia REM, hereinto, about 20% to 25% of the money were invested in REM. Since the beginning of 2008, the fund flows of Asian countries investing in China REM just increased. The main investing institutions including the Asia Financial Holdings Limited Company, Singapore CapitaLand, Philippine Capital Bank etc. invested more than 5 billion RMB in China REM, hereinto, CapitaLand invested billions USD in China for real estate development during 2009. Data showed that from 6 June to 20 July in 2006, less than 50 days, only the real estate projects which were formed by foreign institutions investing funds with the formation of independence or as shareholders in REM were as many as 15, that was, every three days got a city. Among them, only the Standard Chartered Bank in Shanghai constantly took four large projects. Besides, it was understood that from 2005 to 2006, the Investment Corporation of Singapore Government consecutively won two projects by way of shares in Tianjin in less than a year, with investments totaling 400 million RMB. On 27 October, 2006, Hong Kong Chinese Estates offered the price of 732 million RMB and took nearly 140 acres of land won in Chengdu. 2.2. The characteristics of foreign investment in China REI As the strong demand for foreign capital inland and the optimistic from foreign investors to China REM, for the benefits, there have been a large number of foreign investments comprehensively entry into China REM, including Morgan Stanley, Goldman Sachs, Singapore CapitaLand, the Singapore Government Investment Corporation, the Dutch ING Group, and a large number of international investment groups and investment funds. According to statistics from the Central Bank, the proportion of foreign investment in China REM has reached 15%. REI as an important

Qiu Feng & Duan Wenlong, 2010. Analysis of foreign capital entry into China real estate market [J]. Group economic research. 2010(1-1). Page 44.

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driving force of rapid economic development in China, has formed a big "world construction site" and created a "world market" for REI and related industries, also bring a "world largest business opportunities".(Yang Yu, 2007) In the process of foreign firms entering the China REM and accessing to huge business opportunities, there are some following features: 2.2.1. The source of investment is mainly on Chinese capital Source of funds is mainly on Chinese capital, and European and American capital is rapid growing. As the unique geographical advantages, the Chinese capital from Hong Kong, Macao and Taiwan entry into the mainland market has a long history and considerable cultural foundation, the investors have rich experience and strong ability to grasp the market when invest in the mainland. Meanwhile, more favorable investment policies and relatively low investment costs in the mainland market, which make operational risk more controllable and expected return relatively high; therefore, the funds from Hongkong, Macao and Taiwan have always been the subject of foreign capital. The funds performance is very actively in the high-end market, and involve in real estate development, real estate finance, real estate services and other fields. Data shows that since 1980s, most of foreign investments in REI were Chinese capital, among the 5,000 foreign investment enterprises, Hong Kong, Macao, and Taiwan accounted for 76%. Relative to the active performance of Chinese capital, the performance of Europe and the United States capital is relatively cautious, mainly because of cultural differences. Their initial investment tended to invest in the weakest link of China REI, including building design and intermediary

Liang Shaolian & Zhang Renkai, 2008. The status and countermeasures of real estate industry using foreign capital [J]. Real Estate Finance. 2008 (8). Page 43.

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services field. Furthermore, it took in cooperation with other investors or developers, and in particular valued the local partners in the management team. In recent years, European and American capital in China REM has been booming, the capital scale of operation has increased year by year. Morgan Stanley, the Dutch ING Group and other investment groups all took a large-scale capital operation in the Chinese market. (Zhu Wensheng, 2006) As the gradual rise and the potential of sustainable development of the Chinese market, Europe and the United States capital will be attracted more to China. As Singapore investors also have a number of geographical and cultural advantages, its foreign investment in China REM also takes very considerable proportion. The same cultural root makes Singapore investors deal with complex issues well in the process of investing. At the same time, they have the West investment philosophy, so they resorted to the operation of the Fund and collaborative approach with local developers; carefully and actively expand the market space in the China mainland property. (Zhu Wensheng, 2006) 2.2.2. The investment objectives expand in the low-end properties Along with the further development of reform and opening up, and China fulfilling the specific commitments of open REM after accession to WTO, the investment objectives of foreign investment in China REM gradually expand from high-end properties to the low-end properties. From the investment objectives, at the beginning, the most important objective of foreign investors entry into Chinese market was the large city's high-end properties. From 2003 to 2004, the investment focused in the residence, especially in high-end residence; by the end of 2004, foreign investing funds quietly shifted the focus to the business areas which were mainly on Class an office spaces; since 2005, the main direction focused on the
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business real estate of city center. In addition to sequentially maintain the large investment in high-end properties, they showed a trend of gradual expansion to the low-end properties. In 2006, the Ministry of Commerce issued a document claimed strict control of foreign investment in REI; in 2007, the Ministry of Commerce issued a document again, it continued to strictly control foreign investment in luxury real estate. By the State macro-control effects on the REI, foreign investments in China high-end real estate were limited, while China REI as " last trade with a huge profit in China ", foreign investment did not reduce the enthusiasm; therefore, under the case of foreign investors maintaining a certain investment in high-end real estate, they bounded to expand in the middle and low properties. For different types of foreign investment, the investment objectives are different. The development foreign capital gradually shifted from commercial property residential property, from the high-end properties to mid-high-end, mid-end and low-end properties; the property type of rental-type foreign capital, mainly depended on the mature commercial properties with stable tenants. (IRI of SUFE, 2008) 2.2.3. The operation of foreign investment capital reveals advantages Whether the enterprises could get the high efficiency of capital operation is the key to achieve profitability. Most of the foreign investments in China REI are internationally renowned brands, so compared with the domestic real estate developers; they have obvious advantages of capital operation. First, foreign investors who enter the China REI generally have abundant capital, and can take this advantage to occupy the market. The high technology and high investment is closely linked in the REI, so in the competition of the REI, the higher level of the capital occupation they have, the more widely space of development they can get. This phenomenon even in the domestic real estate enterprises has also shown very clearly,

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let alone in foreign-funded enterprises. Second, the form of foreign capital entry into China REI is not a single-capital style, but to enter by form of group army along with financial capital, insurance capital,

telecommunications capital, automotive and other high-tech-low-cost material capital, entry into China REM. With army-style entry into China REM, on the one hand, it can make up for lack of REI investment funds in short term, and accelerates cash flow; on the other hand, it can also speed up the process of capital accumulation and thus bring more capital to invest in REM. Third, foreign capital can use comprehensive housing consumption credit to attract new housing owners, while insure the housing mortgage loans. Internationally, this type of insurance has been already quite mature. In the housing consumer credit, although domestic REI has borrowed some successful experience from foreign in recent years, t in comparison with international capital, still remained immature. Foreign capital can be more attractive by its consumption policies to affect consumers. Fourth, foreign capital is superior to domestic counterparts in high grade trends of the property management and specialization, and has globally consistent service levels with high brand awareness, mature operational experience, successful business model and huge

scale-efficiency etc.; therefore, these form an enormous challenge to China existing real estate agency and leasing institutions. (Li Xiangying, 2006) 2.2.4. The entry of foreign investment in China REM promotes the development of the relevant market Currently, foreign real-estate investments in China REM mainly focus in the domestic weakly developing fields, such as construction planning and design industry, building materials manufacturing industry (BMMI) and real estate service industry (RESI). First, the architectural design market is

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very large in China. The architectural plan-designers are in short supply, but the urbanization process in full speed in China, and all the medium and small cities are in the transformation and expansion with the majority of large public construction projects. These projects commonly use international tender system, which makes foreign investment enterprises with great achievements and experiences get obvious advantages, and often won in the tender. Second, the BMMI. There is a strong correlation between REI and BMMI, according to projections: per 100 RMB uses in residential consumer products will produce nearly 300 RMB in consumer demand in other industries. The building materials furniture market and building materials market which led by the large China REM have become the battleground of many foreign investors. Third, the RESI. At present, as growing market competition and service quality continually increasing, the prophase planning and design and consultancy management of commercial housing are asked for new requirements. Marketing and escrow is paid more attention. But, in Chinese, the scale of real estate agencies is smaller with uneven quality of employees, low level of specialization and no standardized behavior, which results in market disorder, unfair competition and against the interests of consumers etc. This has created favorable conditions to flex their muscles for foreign real estate agencies in aspects of management consulting, marketing extension, property management, project management and second-hand housing market etc. (Zhang Hong, 2007) 2.2.5. The access of foreign investors enhances the international level of Chinese enterprises Foreign investors accessing to China REM will produce two effects: first, the competition effect. With capital, technology and management and other ownership advantages, the cost structure of foreign investments is

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clearly superior to the Chinese real-estate enterprises. In terms of profit maximization objective, they will be with their own advantages to compete with Chinese enterprises and give full play to the inherent competitive features, to occupy the China REM with competitive means to speed up the market reshuffle and survival of the fittest, result in promoting the Chinese real estate enterprises to international standards. Second, the cooperative effect. Although foreign investors have their own advantages, under the unique multiple factors in China REI, such as policies, patterns, relationships and information symmetry, they have not formed effective business models and lack of operation platform for efficient investment in China REM, to make up for these deficiencies they need to interact with the cooperation of Chinese enterprises. Moreover, Chinese companies in REI has experienced market test for years and formed some large-scale, cross-regional and multi-industry groups, such as Shenzhen Vanke, Dalian Wanda and Beijing Shouchuang, Taihe, Huayuan and Wantong etc. who already have and the development conditions for cooperating with foreign investors. (Jian Desan & Wang Hongwei, 2003) Foreign investors accessing to China REI can enhance the international level of Chinese enterprises, in order to better participate in international competition; in extension of foreign markets, Chinese enterprises can cooperate with foreign investors, including capital cooperation and labor cooperation etc. 2.3. The form of foreign investment in China REI There are various forms for foreign investment in China REM, including foreign direct investment (FDI), foreign loans, foreign institutions and individuals investments in REM etc. 2.3.1. Direct investment in China REM
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FDI is that a company set up new facilities by direct investment in foreign country to produce or marketing a product, it is an important way for China to use foreign capital. Since 1979 implementing the open-door policy in China, absorbing FDI continuously made new progress, through the efforts in the past 20 years, it has made remarkable achievements, and played an important role in promoting economic development, enhance the comprehensive national strength and international competitiveness force for China. FDI is an important form for foreign funds entry into China REI. This foreign investment is focused on using in the development area; there are two major ways for its entry: one is foreign funds directly setting up development companies in China REI, the other is conducting acquisition of shares of well-known development enterprises in China REI. (Jiao Yongfu & Yan Junai, 2003) 1.3.3. Using external debt and financing to enter the China REI External debt is an act of borrowing money by the domestic real estate development companies for making up for lack of funds and further developing in REM from foreign institutions and individual. In 2007, the State Administration of Foreign Exchange issued a notice again, to stipulate that stop to transacting all the procedures of registration of foreign debt and settlement of foreign exchange in foreign investment projects in REM after 1 June. Therefore, from 1 June, 2007, the external debt would not become a way to enter China REI. (David K, 2002) There are three ways for financing: (1) Chinese real-estate company, through overseas going public, imports the foreign capital; itself (2) into by a

"self-acquired"

manner,

restructuring

company

foreign-funded enterprise which wholly owned by domestic residents, and enables organization to quickly build the convenient channels for international financing, resulting in getting the opportunities of listed
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overseas fund-raising by borrowing shell from a aboard company name; (3) after pricing the shares of domestic enterprise, sell them to aboard organizations or individuals.( Ding Jian, 2005) Zhejiang Greentown Group operate simultaneously more than 40 projects, and its main business of real estate across the development, landscape, material and other links, funding constraints. For this situation, in addition to find various kinds of ways for financing in the country, the company also had to go overseas for financing; in 10 January, 2006, the Group holding company registered overseas - Greentown China Holdings Limited Company directed issued 130 million USD of convertible bonds to an international consortium which was organized by Morgan Stanley and Stark Investment, the on 16 January it transferred 2% share of the Greentown China Holdings Ltd by 20 million USD to this international consortium.( IERD of CDRCS, 2007) 1.3.4. Individuals or foreign institutions investing in REI The third form is that individuals and foreign institutions (non-resident institutions) invest property, that is, non-resident institutions purchase commercial houses by self-purchase and underwriting, then through the resale get premium. There are two main ways: one is non-resident individuals and institutions purchasing real estate; the other is foreign institutions establishing agent companies of foreign investment in China REM, holding and managing property rent collection, or reselling to get the price difference; then, remitting after formatting profits, or remitting liquidation abroad after the end of projects.(Wang Xiying etc., 2005) "Personal Foreign Exchange Control" was passed on 30 November, 2006 by the Council, and had come into force since 1 February, 2007. Article 22: foreign individuals buying domestic commercial housing should be consistent with the principle of personal use, and its foreign exchange income and expenditure should comply with the relevant foreign exchange
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regulations. Proceeds in RMB from foreign individuals selling domestic commercial housing, which can be approved by the SAFE then purchase foreign exchange to remit. Therefore, the individual investment in China REI is currently restricted. In order to limit the influx of hot money from overseas, foreign institutional investment in China REM is subject to restrictions from the new related provisions for China REI.

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Chapter 3: The motivations of foreign investment in China REI In western countries, the price rises of real estate across almost the entire 1990s, so that Stiglitz called this 1990s as blatant 1990s". In the second half of 2000, after the western economy went into recession, REM was the only asset market which continuously rising, even Japan, in 2004, also appeared the first time rise since the bubble economy in the early 1990s. Among them, according to statistics from the federal office of housing and observation, only in 2004 one year, American house prices raised up 11%, as the highest record since 1979.Since 2005, the rising trend of the REM in the major Western countries still did not stop. (Qian Conglong, 2006) But the bull market of REM in Western countries has been near the end, and the groups benefited from the real estate bubble in the Western countries all required the need to transfer funds. In this context, the China REM has become the favorite choice for foreign investment and especially the speculative international hot money. 3.1. The analysis from the macro-level In recent years, China REM has been a very impressive performance among the bull market of global REI. In the real estate rental market which directly involved the largest offshore fund, the yield of China market is generally 50% higher than in Europe and the US. In the 2006 Shanghai International Real Estate Conference, the Chief Planner Stephen M. Coylc of the Real Estate Investment Department in Citigroup said the yields of real estate rental market in London, the US and Japan's were only 4%, 4.5% and 3. 5%, but were up 7% in Shanghai. The real estate development industry in China is staggering profits.( Di Cha, 2006) Large influx of foreign funds are invested in China REI, in addition to be impacted by the international market, from the macro level, is subject to China macroeconomic environment, demand for REM and real estate policy
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environment. 3.1.1. China's sustained and steady economic growth The current world economy has maintained rapid growth momentum. As the process of deepening regional cooperation, international trade is growing steadily, and the world cross-border mergers and acquisitions are more active, and international investment has also increased. In 1979, China began a series of market reforms, thus, the Chinese economy has gradually become part of the world economy and cannot be ignored. Since 1979, China's GDP average annual growth rate is 9.7%, the total growth is more than 700%; average annual growth of foreign trade is nearly 15%. China's growth, stability and potential makes foreign companies surge passion to China. The businessmen who have been to Shanghai and Beijing for tourism and study believe that the 21st century is China's century. FDI has swarmed a lot into China in the past decade. In 2002, China attracted foreign investment reaching 53.2 billion USD, as the country which absorbed the most foreign investment around the world. In 2006, China ranked the worlds third in attracting foreign investment.(Judy Q 2007) Robert Bestani in Asian Development Bank branch called this as "wealth impact" - the foreseeable future - to describe the changes in China is growing so fast. Dietmar Nissen, the President of East Asia in the large chemical company BASF, said that "China's speed and scale of development over the past 12 years is a miracle with orderly development". With the economic development and improvement of living standards, Chinese people's consumption level is rising. The real estate as the consumption of fixed assets for residents, its demand continues to climb. In particular, Chinas economy is showing the dual-economy

characteristics, and the future economy will go to a unified economic

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development track. With economic growth and the rural-urban gap narrowing in the future, the urbanization process will further accelerate. Therefore, China's economic development will inevitably lead the demand of REI which is peoples basic necessities to increase. Large number of foreign real estate investment companies entry into China REM is to share the benefits of economic growth in China. 3.1.2. The demand and high investment rate of return in China REM Foreign funds invest in China REM, first, because there exist needs in the domestic REM. According to analysis, the growth rate of the real estate is available more than 20%; this rate is supported by the strong demand. Among the factors of triggering real estate to be hot, the strong demand from the urban infrastructure and urbanization has been the main driving force for real estate investment. A research data shows that in Chinese urban the housing space per capita is only 15-24 square meters, there is still a big gap from the developed countries. The process of urbanization is a key factor to support the REM needs. "The Development Strategy of China's Urbanization" plans requirements that in 2010, China's

urbanization level will reach 40.5% and exceed the average level of developing countries'. So, China will need to transfer the population of 106 million as urban population, while by 2020 this figure will reach 325 million, by then, China's urbanization rate will reach 53%. At present, China's urban population is about 400 million, if adds additional 325 million, equal to the current urban population capacity will need to nearly double. If it calculates by 20 square meters per capita of housing space, only housing will need more than 6.5 billion square meters.11 The huge gap of the demand in REM will inevitably lead the high rate of return for real estate investment. REI known as the last lucrative industry
11

Within two years the real estate demand is still strong. Economic Observer. 2004.

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in mainland China, the REM of Beijing and the regions in Yangtze River Delta and Pearl River Delta are in particular hot and lucrative. The high investment and high return in China REM is one of the most striking phenomena the in Chinas economic life, even in the world bull market of real estate in the past several years, the performance of China REM was very compelling. 3.1.3. The orders of REM gradually regulate (Gao Shuguang, 2006) In recent years, China has published a variety of policies and regulations for regulating and associating the REI, and strengthening the monitoring of the REM; therefore, REI is gradually forming the normative development and operation. First, increase the proportion of capital in development projects in REM. From July 2004, the ratio requirement of own funds which are for developers to develop in REM increased from 20% to 35%. This policy put a higher request for the strength of real estate development companies. Second, by raising the deposit reserve ratio and the interest rates for deposits and loans, financial institutions strengthen the audits to real estate development loans and consumer loans, so bank loans are under control. Meanwhile, due to this policy relatively increases developers cost of ownership, and then promotes them to start looking for more financing channels Third, after 2004, through reform of land requisition system, readjusting the various development zones and land market order, to carry out unified bidding, auction and listing transfer and other measures for business lands, the primary market of land has been further standardized. Fourth, through strengthening the system of laws in REI, the market
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supervision system and the market order has been father improved. China has unveiled a number of policies, such as Construction and management for affordable housing", "Property management regulations" and "Notice of further strengthen and improve the management of rental housing" etc. Some major cities speed up the construction of information systems and early warning system of the REM, to create the conditions for guiding rational investment of real estate development companies and rational consumption of residents. 3.1.4. Beijing 2008 Olympic Games has promoted China REI 2008 Olympic Games held in Beijing and the 2010 World Expo held in Shanghai, which should be one of the factors driving the REI and cannot be ignored, especially provided an important opportunity on REM development for Beijing and Shanghai. Beijing hosted the 2008 Olympic Games and brought huge business opportunities to Beijing's REM. According to the financial statements in the report of Beijing Government and the "Fifteen-year plan, the total investment for Olympic Games reached 280 billion RMB, hereinto, 180 billion RMB for urban infrastructure facilities, 17 billion RMB for sports facilities, 71.3 billion RMB for improving the environment. Beijing speeded up the transformation of old houses and housing building, which was the first opportunity for investors in REM. After five years, Beijing completed the reformation of 9 million square meters of inhabitable houses, which made Beijing's per capita housing area up to 18 square meters.12 Beijing spent heavily in the construction of subway, light rail, highway and airport etc., governed and improved the environment, resulting in a

corresponding increase in the gold content of houses. Both of developers

12

Index volatility: 1911-2849. http://news1.jrj.com.cn/news/2006-12-25/000001877959.html. 2009-12-25.

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and home buyers are the winners. 3.1.5. The expected appreciation of RMB In the long run, a country's economic development will accompany the appreciation of the currency of this country. After 30 years of China's reform and opening up, the economy gained rapid development, the REM has been rising with the strong country strength. In anticipation of RMB appreciation, external financing tried so hard to go into China to get the benefits from RMB appreciation. But currently China's capital projects do not open up, so there is certain degree of difficulty to direct access. Different from the practice of international real estate investment which usually including real estate investment in capital project management, China REI has been classified as the current project in balance of payments to manage, and opens up to foreign investors. In particular, after 2002, China canceled distinction policy between the domestic housing and the export housing, for foreign institutions and individuals invest in REM without any restriction, which stimulated the foreign capital which hoped of RMB appreciation entry into the China REM. The foreign capital continued to enter the China REM, which further enhanced the expectations of RMB appreciation of foreign institutions, enterprises and individuals, forming a kind of cycle "expectations of RMB appreciation capital inflow - expectations of RMB appreciation".(Hua Wei etc., 2005) 3.2. The analysis from the micro-level The nature of capital is the pursuit of profit, foreign investment in China REI is an effective measure to reduce investment risks and achieve capital preservation and appreciation, which can earn a space profit from the rise of China's house prices. From the micro-level, foreign investment in China REI is promoted by the following factors.
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3.2.1 The requirements for allocation of foreign funds When foreign investment enters REM, normally takes into account the
1 following factors: Profit, including regular cash flow and capital 2 appreciation. Security. Investors often weigh the opportunity cost of

funds, they think of the risk which will be not recoverable or cannot obtain a return, and country risk, such as national policy and capital withdraw etc.
3 Foreign investors also consider the factors of market cycle, tax status,

financial leverage effect etc. when they invest in China REM.(Meng Xinyu, 2006) Currently, worldwide there is a large number of international hot money, and it is estimated that there are trillions of dollars of international hot money around the world. The development of information and computer technology brings the convenience for the hot money in search for investment opportunities around the globe, and "property speculation" is one common form. Characteristics of international hot money: while there are benefits they pouring, no benefit collectively retreating, this is due to the objective of their nature of capital pursuit of profit. At present the talisman of a large number of international hot money entries into China REI is: the possibility of long-term value-add of China's top property, expectations of RMB short-term appreciation, capital advantages of early intervention and good level of profitability. (Lian Lina & Tang Yawen, 2006) But for China, the degree of real estate financing in Shanghai, Beijing, Guangzhou and other big cities is too high, which often form from foreign investment, and the formation will then the same as the magnet attracts more overseas funds. (Figure 5) Therefore, fundamentally speaking, foreign investment in China REM is the result of the interaction between China REM and international hot money. 3.2.2 Avoid exchange rate risk, capital maintenance and appreciation
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Since 2000, USD has been in weakness for long time. From 21 July, 2005, China began to implement a market-based and more flexible RMB exchange rate mechanism. The same day, the People's Bank adjusted the trading price from USD to RMB to 8.11, which is RMB appreciate by 2% for one time. On 16 July, the central parity of USD against RMB was adjusted down 50 points and into the 7.56 range, then until 19 July, the central parity has been fine-tuned in the interval. In accordance with the central parity terms on 20 July, 2007, in two years, RMB has appreciated 8.64% rate.13 As expectations and reality pressure on RMB appreciation, most investment institutions and individuals consider that investing in REM in China mainland can both avoid the risk of USD falling and make capital in maintenance and appreciation. Foreign investment in REM is affected by RMB appreciation, because it can access to the benefits of exchange rate fluctuations. 3.2.3. Use different interest rates, lower investment costs There are interest rate differences between different international currencies; this brings shrewd investors choices to reduce the investment cost. Domestic individuals or institutions can use international loans invest in the domestic REM instead of getting benefits from the interest rate difference by domestic loans, thus reduce costs. This is also a potential for foreign investment demand, which is an implicit demand for foreign capital. (Peter G, 2004) 3.2.4. Access to the arbitrage from housing price rising In the course of housing prices rising, foreign investors can win profit by
13

Recalling a week foreign exchange marketin two-year exchange reform the cumulative RMB appreciation has been 8.64%. http://www.eeo.com.cn/eobserve/data_ceneter/gold_forex/2007/07/20/76833.html.2007-7-20.

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means of relatively buying low and selling high. In the eyes of investors, the housing market is another stock market, when house prices have been pulled; they throw out the houses and get earnings then withdraw. So that is not a valid capital, the REM real demand cannot fill the vacuum due to the withdrawal of hot money in time, which brings a negative effect on the healthy and stable development of REM.(Peter G, 2004)

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Chapter 4: The impacts of foreign investment to China REI development China's economy has increasingly become an open system, after China's accession to WTO, the pace of REI speeds up to open up to foreign investment, the economic operating rules of REI will be gradually transparent, open and fair, the impacts from foreign real estate investment to China REI has been gradually clear. 4.1. The positive impacts Obviously, there is positive significance of foreign investment entry into China REM, specifically, mainly in the following aspects. 4.1.1. Update the investment philosophy With the continuous deepening of reform and opening up, REITSs, mortgage securities and other financial instruments are gradually well-known with the entry of foreign capital in China, and may be as true investing tool used by China real estate companies and investors. The emergence of these new investment vehicles and new investment ideas apply new development ideas for China real estate enterprises. Due to the concept gears to international conventions, makes China real estate companies have the opportunity to participate in the international market, thus promote the China REM integer into the process of the international market. (Xue Baoman, 2007) 4.1.2. Improve the capital structure of enterprises As the severe shortage of equity capital, over the years, China real estate development enterprises highly depend on various types of bank financing. The entry of foreign capital contributes to capital structure improvement

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for these enterprises. Looking for cooperation partners in China, foreign investors pay more attention to the scale of business, management and land reserves, so the large enterprises which have great advantages in the aspects of scale, management, and land reserves etc. can get support from foreign investment, resulting in pushing the new process for business survival of the fittest.(Xue Baoman, 2007) 4.1.3. Enhance the operation and management level Foreign investment in China REI can improve the overall level of China REI from two aspects: one is that foreign investors directly invest in real estate enterprises by FDI and use their demonstration effect to force local companies to improve management level, to face competition in REM with foreign investment. The other one is the improvement of operation and management level from the cooperation between foreign and domestic companies, the afflux of foreign capital brings advanced operation and management concepts are conducive to long-term development of real estate enterprises in China. (Jin Lanzhu & Yin Zehuan, 2007) 4.1.4. Promote China REI to gear to the international conventions The entry of foreign investment real estate enterprise (FIREE) promotes the REI upgrading. It is not only the result of China REI opening, but also further promotes the openness of China REI, and makes China REI gradually learn to accommodate the operation rules of the international REI, and then improves the norms and transparency of China REI. The entry of FIREEs will also accompany and promote the advanced real estate services companies to enter. To REI, all of these will finally provide better service by lower cost for real estate companies, increase the supply level of real estate products, promote industrial upgrading, and make every chain of REI more professional. However, to promote China REI to
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gear to the international conventions, eventually it still needs to increase the competitiveness of the domestic real estate enterprises to complete. (Li Dan, 2006) 4.1.5. Make up for shortage of funds Foreign investment can make up the problem of fund shortage in (super) large-scale projects, and bear the risk of these projects. FIREEs entering China, generally their investment is in mid-high-end market. Among the projects in mid-high-end market, especially super-large projects or large projects that take up very large funds; moreover, there is greater risk in high-end real estate market. Chinese enterprises lack experience in this area, which makes it difficult to find the appropriate project stakeholders in domestic enterprises. (Han Zhongxue & Zhu Ronglin, 2006) Among FIREEs, there are a batch have rich experience in project operation in their countries and can more easily finance the required huge amounts of money, which largely resolve the capital shortage in the very large or large-scale projects in China, and bear the market risk of this part of the projects. 4.2. The negative effects 4.2.1. Affect living standards of ordinary people in China In early foreign capital, the successful experience of participating real estate joint development projects was little in China, which led to the current foreign investors prefer to invest in three-level market and play significant role in promoting housing prices. Although currently the main objective of foreign investment is high-level property, house prices in high level eventually will lead to upgrade the overall house prices rising. On the other hand, due to expectations of RMB appreciation, a lot of hot money entry into China, because of the higher profit margins and good liquidity in
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China REM, here will be the focus place of these funds and also lead to rising house prices.(Figure 6) Land is scarce non-renewable resources, the current control measures of China REM only direct at the real estate enterprises and domestic real estate buyers, which cannot blow hot money inflows and lead quality resources to inflow in the hands of foreign capital, resulting in the loss of national wealth and undermining the balance of domestic economic interests.(Yang Youzhi & Liu Jianming, 2007) 4.2.2. Not conducive to market stability The large volatility of foreign capital is not conducive to market stability. From late 1980s to mid-1990s, the one to two times of return in China REM stimulated the entry of foreign investment, and formed the first upsurge of foreign investment in China REI. However, from 1997 to 2000, the actual using scale of foreign investment in real estate development greatly decreased, and its proportion took account in the scale of investment and development in REM almost decreased in a straight-line, so using foreign capital in China REI entered atrophy stage. (Wen Ren, 2007) Since 2001, due to the rapid development of China REM, foreign capital began to enter China REM again. Therefore, when China REM booms, a number of foreign investments just enter; when the REM turns into a recession it will quickly withdraw, causing severe fluctuation in REM. For the sustainable development of China REM is very adverse. 4.2.3. The impact to financial system and the real estate enterprises At present, the scale of foreign investment in China market is not very big, but along with the further development of China REM, there will be more and more foreign capital entry into China REM. While the characteristics of existing foreign investment in REM, such as pursuit of high profits and
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short cycle, which affect the stability of the monetary policy and equilibrium in China's international payments. Furthermore, the financial market in China is imperfect recently, the volatility of foreign investment probably impacts unsound financial system. A number of foreign capital entries into China REM, capital inflows will make the international balance of payments further expand, thus increasing the pressure on the appreciation of RMB. The latest information from SAFE showed that before late June in 2006, China's foreign exchange reserves balance was 9411 billion USD, and 32.37% year-on-year growth. From January to June, foreign currency reserves raised by 1222 USD, and year-on-year growth 212 billion USD.(Figure 7) In the virtual high trade surplus, there is a lot of hot money which speculates RMB appreciation, quite large part of money was invested in China REI. Mass flow of overseas capital to REI not only exacerbates the current RMB appreciation, but also once the investors believe they get the appreciation top, they will collectively leave, which makes interest rates increase and balance of payments imbalances. Japan's experience is lessons drawn from their mistakes for China. In the 1980s, Japan's low exchange-rate policy caused many international speculators entered, during that period, foreign exchange reserves increased sharply and brought enormous inflationary pressures to Japan economy, which made house prices in Japan high. In the 1990s, the real estate bubble in Japan busted, international hot money left, housing prices slumped, foreign exchange sharply decreased, and from this, Japan's economy dropped into long-term depression in ten years. (Wei Hongxin, 2006) Foreign investment is generally the transfer of a package of investment factors, except the funds shortage of China REI; they also transfer operation and management resources, such as strong management, sales management, property management etc. (David K, 2002) Foreign
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capital entries into China REM and it bring large impact to China real estate enterprises in the high-end market, but small impact to ordinary market. 4.2.4. Enhance the market risk of REI The entry of foreign investment is generally into the main cities in China, among the real estate investment, it also generally invest in the high-end market, and generally in the office, hotel, luxury residential development and investment in high-end commercial buildings. The initial entry of development investment saw market opportunities and potential demands which existed in the Chinese Cities and could meet the demand in the high-end market in China. However, because of the pursuit of high profits and following effect, the supply involved in high-end market increased, resulting structural overheating in large Urban, and made risks in high-end market increase. Foreign real estate investment relatively focuses too much in one city during short period of time, which could result in real estate demand excesses, leading to sharp rise in house prices. As the radiation of house prices and the emulation effect in the pricing process by real estate businessmen, it will raise the real estate prices of other lands and other level. (Franky P, 2006) The national macro-control has little effect on this. 4.2.5. The weakening issue of the subject status Foreign investment enters real estate development field, initially a lot of them used the way of joint venture cooperation with Chinese partners. Joint venture and cooperation will form complementary advantages and risk-sharing. In this process, many Chinese partners became the crutch for foreign investors to explore China REM, and played a large role for them to understand China REM and operate and stand firm in China
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irregular market. Before the CEPA14 came on, usually Chinese partners provided lands and foreign partners provided money. Foreign partners took more proportion and managed some major department in the joint venture company, also were responsible for the basic operation. Many Chinese partners with government background, in this situation, thought encountered the savior and placed their hopes on foreign partners, and paid no attention to improve their management skill and development level. Foreign-owned enterprises that have grown in the Chinese market for many years, and pay more attention to the strength and the background of partners; therefore, the relatively weakness of the strength of the original Chinese cooperation makes foreign partners may get rid of the Chinese partners or reduce the control of Chinese partners anytime.(Qu Weidong, 2006) 4.2.6. Squeeze the profit margins of local enterprises in China REM Foreign funds entry into China REI makes up the capital shortage issue for Chinese enterprises in super large or large projects. However, due to the foreign enterprises tend to more easily get support from financial institutions in China, and squeeze the profit margins of local enterprises in China REM. Different from net development enterprises by foreign investment, foreign development-oriented funds come to China offers financing channels for Chinese real estate development enterprises. But foreign funds entry into China, it just finds the high yield in some cities REM and wants to share this. It is reported that in the U.S., the average annual return of the real estate investment fund is 6%, in Japan and Singapore is 4%. But in Shanghai, it is more than 20%. Additionally, the overseas funds can only be perfected, if a real estate enterprise cannot finance money in domestic,
14

Closer Economic Partnership Arrangement.

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it will not get it from foreign funds. So, for the China enterprises who access foreign funds, must share the established profit to foreign investors. (Wang Dongdong, 2006)

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Chapter 5: The recommendations for China using foreign investment in REI After joined the WTO, China further accelerated the pace of opening up the REM, it has been the general trend that REM and related markets gradually form an open system. In this case, protecting themselves is not sidestepping or to be passive, but to explore their own strengths and continue to grow themselves. At the same time, foreign capital is not formidable, China should provide an effective platform to guide it, when it gets profit, and it can be for our use. China needs to make good preparation for REM to link up to the world. 5.1. The roles of China Government Large-scale entry of foreign investments brings some positive effects to China REI, but their nature of pursuit of profit is bound to increase uncertainty and risks in China REM; therefore, China government needs to develop countermeasures to reduce its negative impacts. 5.1.1. Improve and perfect the existing laws and regulations First, abolishing the preferential treatment of foreign real estate enterprises and strengthening tax administration. One is abolition of the tax breaks for foreign investments when enter REM. This requires consolidation of income taxes in domestic and foreign areas etc. by the tax law providing institutional support. The other one, due to the speculative behavior of foreign investment in China REM, China Government could through the form of introduction of property tax to stop it. In addition, to deal with speculative hot money, a more effective approach overseas is impose Tobin taxes on capital inflows to increase information costs and transaction costs; such as setting share as 30%, if the inflow is 100 million RMB, it can only use 300 thousand RMB, and the
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other 700,000 RMB can not be used. Second, adjusting the real estate industry policy and regulating market access for foreign to enter China REM. REI policy must meet the housing needs of Chinese residents as the fundamental starting point, to prevent the speculation behavior of foreign investment in REM. Many countries around the world, including the developed countries which have few people and many lands, all have a corresponding real-estate policy. Such as Australia, the maximum acreage that allowed foreign funds to buy 20% to 30% of new houses, and must be approved and illustrative purposes, which is for cracking down housing speculation. In China, after the abolition of differences between the domestic and export commodity houses, the government introduced no matching investment policy which limit non-residents purchase investment house, resulting in hidden danger of foreign investment speculating REM. This may lead hot money to quick inflow and outflow, and raise the house prices to increase the difficulty of improving housing conditions for Chinese residents. Thus, the present REI policy must be adjusted, and can not just aim at GDP growth and attract foreign investment blindly. China Government should strengthen the protection and management of land, resources, environmental resources, and prevent the abnormal ways to attract foreign investment, such as sacrifice the environment land as the cost. (Ping Lanyon, 2006) 5.1.2. Strengthen monitoring of foreign investment entry into REI First, strengthen the supervision on illegal foreign exchange transactions to aboard. Currently, SAFE practiced the "strict entry, stringent exit regulatory measures for foreign exchange funds in REM have been more strict. But in China's economy developed areas, underground illegal foreign exchange market is still very active. So it cannot be ruled out foreign capital through various means to inflow in China REM by avoiding
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the supervision from SAFE. (Ba Shusong, 2006) Therefore, to enable management measures can reach excepted results, it needs to associate relevant regulatory authorities to strengthen the crackdown on the various types of illegal transactions of foreign exchanges, and try to put all foreign capital flows which involved in REM into the control range of SAFE. Second, seize the financing links and conduct strict financial supervision. Above all, to strengthen credit management of the real estate mortgage loans and personal housing mortgage loans, China Government needs to strictly control the unreasonable demand for real estate loans to prevent loan risks. Government requires that banks (including foreign banks) are not allowed to provide non-resident individuals and foreign institutions the housing mortgage loans of foreign exchange to buy commercial houses in China REM, to curb non-resident individuals and foreign institutions to speculate real estate by speculations. Next, China Government should carry out the relevant policies and regulations as soon as possible to enhance the management of real estate funds. As in the China there have been not perfect laws and regulations for REI funds; therefore, the management on REI funds stands in the situation of no laws to abide by. The past several years, foreign capital entry into China REM, in addition to enter by the ways of wholly owned company and joint venture company, and often as the status of foreign fund investment company to invest in REM, such as the investment fund in REI which is subsidiary of Morgan Stanley ( MSRFF), ING Real Estate and CapitaLand etc.(Yi Xiangrong, 2006) Although foreign investment funds always appear as investment companies and investors, but the core content is still investment and financing activities, and amount of investment and financing is huge. Third, monitor the trading process and use tax measures to control foreign capital speculation. Trading processes mainly include transactions of

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existing homes and second-hand housing in the Real Estate Secondary Market, which directly affect the real estate market demand and is the main factor affecting house prices. According to international experience, it should be appropriate restrictions foreign investors to buy real estate, focusing on inhibition of the speculative demand for foreign investors, allow the use of taxation to increase the points on controlling the speculative behavior. One is that it should be clear foreign investors must meet their own principles when buy houses, and offenders against the transfer and export the RMB of income received after the purchase. On the purchasing of second homes by the buyer should cancel the preferential policies on taxes and loans; to the mortgage buyers, in a certain period of time cannot transfer the houses, in order to encourage the real housing demand. Second is to strengthen the management of overseas investment funds and limit investment funds buy a large number of houses in China REM. The recent macro-control has put forward related policies on limiting onward delivery housing to transfer etc., which would effectively curb foreign capital to speculative real estate speculators in the trading session. Third is to allow using taxation to limit the speculation of foreign investment in REM. For example, Shanghai municipal government issued a policy which prescribes the transfer of housing in one-year period in should be charged 5.55% sales tax; although it received certain results, the role of inhibiting real estate speculation is very limited. To use the experience of international practice, for speculation of foreign investment in REI China Government must take a stringent policy with levying progressive capital gains tax (PCGT). If profit is 1,000,000 RMB, the first 100,000 RMB should be levied 10% for PCGT; 100,000 to 300,000 RMB should be levied 20%; 300,000 to 500,000 RMB should be levied 30%; 500,000 RMB or more should be levied 50% or more. (Alex W, 2006) PCGT takes great influence on speculative demand, meanwhile, to the entry of overseas hot money will
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also serve as a warning. Fourth, strictly control exchange links and monitor foreign capital inflow and outflow of REI to enhance the management. To distinguish the nature of capital flows to REI, the focus is restriction on short-term speculative capital inflows. Enhancing the coordination of trade exchange

management authorities and exchange management departments and starting from the trade links, which can prescribe non-residents to buy commercial housing should be based on a true purpose of living and office, to limit the speculation in China REM. In addition, real estate transactions should be placed under the management of capital projects. (Song Ancheng, 2006) Fifth, establish monitoring system and seize trends of foreign REM. The networking of foreign exchange management system among commercial banks and regional networking of housing property rights records is the key to monitoring foreign investment in REI. Now even the public housing property with more clear property rights, the file rate is only 60%. Relative to large REM in the national first-tier and second-tier cities, the record networking is very slow.( Melana Y., 2008) So the relevant departments should collaborate to establish the monitoring system of foreign investment, change the current the issues of unclear basic number and no enough administration when foreign capital inflows in REM. It needs to strengthen the statistical monitoring and analysis to foreign investment in REI and build registration system of foreign investors buying houses, to track the flow of funds. After sound risk index system and establish market warning system of every link from the exchange to trading, the management should achieve information and sharing, to and enhance the

communication,

coordination

cooperation,

strengthen

supervision of foreign capital flows in China REM.

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Sixth, firmly implement the New Deal of foreign investment in China REI, and regular follow up effects of New Deal. The existence of REM in structure differences and the differences of development in different economic regions, such differences may lead the actual results of the New Deal on implementation effects show differences in time and region. The implementation effect of the New Deal should be tested. (Feng Zhang, 2007) Therefore, the SAFE and real estate regulators departments should cooperate closely to establish a regular evaluation mechanism to track, and according to new circumstances set policy adjustment programs. 5.1.3. Positively develop Real Estate Investment Trusts (REITS) REITS is the investment funds of a direct investment and finance in REI, or buying and operating real estate equity and debt. In its long process of development, not only provides a lot of money and measures for the development of REI, but also relies on REI to get its own rapid progress. Over the past ten years, the imperfection of real estate financial system made real estate companies over-reliance on bank credit, and the equity financing instruments cannot be fully applied. At the same time, a large number of private capital and financial investment organizations do not have suitable investment channel to access in REI, so financial capital and industrial capital lacks effective docking platform. It should ship new market environment and market demand in China, the development of REITS is an inevitable choice for Chinese real estate finance. REITS will change financing structure with the single nature and single source of Chinese real estate enterprises, to promote the rational development of industry. REITS will ease the expansion of the Chinese real estate enterprises in the capital difficulties, and provide a new investment channels for the private capital which free in REM to enter the REI. (Dominic W., 2007)

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From a global perspective, currently, in the U.S., Canada, Japan, Korea, Singapore, Australia and other countries there have been REITS in the exchanges and list as the same as common stock for transaction. In recent years, Europe, Asia, South America and some other countries have all developed a special legislation for REITS, and promote its development. As the domestic real estate fund category has only just started, and the related regulations have not yet issue, so in product design, legal form, fundraising, mode of operation etc., there are still many limitations and obstacles.(Su Hanchan & John E., Ko Wang, 2003) The approaches of development REITS in China: First, formulate appropriate laws and regulations. Efficient and robust trust supervision system is the stable safeguard of developing of trust industry; therefore, the implementation of sub-industry monitoring is not only beneficial to guard against financial risks, but also help to improve regulatory standards in various industries. To make the sustained and healthy development of REI, China should innovate in the regulatory regime, in addition to establish Trust Industry Supervision Committee which is responsible for overall supervision of the trust, at the same time, in the implementation process, China Securities Regulatory Commission (CSRC) and the People's should actively cooperate and make recommendations, to make execution really play. Meanwhile, except the monitoring from CSRC, REI should set up REITS Association, and establish a number of private self-regulatory organizations as supporting organizations, to monitor REITS on the effective operation. (John W., 2006) Second, the formulation of preferential tax policies. REITS in the U.S. is the most mature one, one of the important reasons is that the tax policy on REITS in U.S. In recent years, some Asian countries (Singapore etc.) all

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light of American experience and develop preferential tax policies for REITS, mainly in terms of the dividend and tax concessions etc. China has not yet established a sound REITS tax system, and there are still two major problems existing in REITS system. One is so far the REITS tax policy has not been clear and stable on policy intentions, the lack of specific laws and regulations, the tax on the trust business to some extent is in a state of no law to accord, which is obviously not conducive to budget accurate trust return on investment for trust litigant, and increases the trust in difficult decision-making for business innovation. The other one
1 is double-taxation problem. Double taxation mainly acts in two aspects:

direct at the tax liability from transfer of trust property at beginning of trust, and from the real transfer of property in the termination of the trust again,
2 which actually overlaps; in the course of the planning existence of trust

schemes, trust returns bring out income tax liability, while trust plans terminate or trust income distribute, there will be tax liability of income tax again. (Michael K. Carnevale, 2008) In view of tax incentives is a major force to develop REITS for the U.S. and other countries, it is suggested that Chinas REITS special laws should be adopted in U.S. law, and no double taxation on REITS. Third, nurture institutional investors and professionals. On the one hand, China must improve the training of special personnel as soon as possible, and establish an army of specialized management personnel who are not only proficient in the REM business, but also familiar with the fund business. Meantime, the cultivation of related professionals is especially important, such as accountants, auditors, asset professionals, asset appraiser and other intermediary-service personnel. Years of experience in the U.S. and other developed countries shows that the higher degree of information disclosure in the fund market, the more mature and developed
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the markets are. This requires that all property-related information, national policies an intermediary services such as training of personnel. Years of experience in the United States and other developed countries show that the fund market, the higher degree of information disclosure, the more mature and developed markets. This requires that all

property-related information, national policies and financial and securities information could timely be accurately disclosure to investors and fund managers, thereby contributing the successful operation and smooth development of REITS.(Hsuan-Chi Chen etc., 2005) On the other hand, according to international practice, the number of institutional investors is an important sign to measure whether a stock market is mature. At present, in China's stock market there has no real sense of institutional investors, and the common existence is the retail investors which fewer investment funds and poor investment skill. These investors stand at a disadvantage in the market, which not only increases the operating costs of the market, but also urgently needs to introduce REITS to get rid of the vulnerable position of small and medium investors. To cultivate such as pension funds, life insurance funds and other institutional investors, China has promulgated a relevant policies, but there are still many limitations and shortcomings.(Mark G., 2008) Thus, with the perfection of the mechanism and management system in stock markets, when absorb advanced foreign experiences, it can approve the pension funds and other funds who have the potential and strong portfolio enter the stock market, and nurture them become institutional investors. This can achieve win-win situation. 5.1.4. Industriously promote the securitization of REM From the perspective of attracting investment, the efforts of policy measures should be directed to make up regional characteristics causing

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of the nature of real estate merchandise, to create a virtual and no region-difference investment environment for foreign investment to maintain strong real estate liquidity and reduce investment risk. In this regard, this paper argues that the REM securitization as an indirect investment measure should be an important measure for expanding foreign investment in REI into a nationwide. (Figure 8) First, the definition of REM securitization The concept of REM securitization refers to transfer the real estate investment into the form of the portfolio, so that transfers the relationship between investor and the subject matter of real estate from ownership of real estate property to the ownership of securities claims. That is from the direct property relations changing into the securities with the nature of the securities holding, which make the value of the real estate from a fixed capital form change into a flow of capital securities.(Huang Liang, 2007) In terms of foreign investment in REI, securitization actually eliminates the regional characteristics in real estate investment, and makes it as investment activities without regional differences. From the practice of developed countries, real estate securitization divides into broad sense and narrow sense. From the broad sense, real estate securitization includes the two systems: one is the securitization of real estate mortgage debts, and the other is the securitization of real estate investment equity. The narrow sense of real estate securitization refers to the latter one. (Huang Liang, 2007) Second, the obstacles and solutions of China current implementing real estate securitization Currently implementing real estate securitization will not only come cross the lack of specialized agencies and personnel and other technical issues,
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but also encounter the following obstacles:

1 Financial institutions, particularly commercial banks are facing risks

from huge bad loans and bad assets to REI. In the initial stage of REI implementing securitization, the bank real estate loans which require securitization should be the credit assets with low risk and low debt rate to reducing the risk of future securitization for protecting the benefits of investment stakeholders. In the process of real estate loan securitization, it must be integrated with local reality, and reform enterprises through stock system.(Wall S. 2010.) Through the reform, restructuring, reorganization and strengthening the management, it makes the majority of state-owned real estate enterprises get out from difficulties. Particularly in accordance with international practice and the rules of market integration, it should speed up the pace of strategy restructuring in state-owned real estate enterprises to promote their establishment of a modern enterprise system, reduce bad debt and improve economic efficiency, so as to create conditions for smooth the implementation of commercial banks to real estate securitization. (Li Lei etc., 2006)
2 China's "Securities Act" does not perfectly prescribe and describe

separate rules for financial asset securitization in the state-owned commercial banks. Real estate securitization is a new technology, how to use this technology and generate the related link effect, which is the issue to for workers seriously think about in the theoretical and practice fields. Due to historical reasons, in the relevant provisions of China "Securities Act", it lacks of provisions on asset securitization in applications of financing businesses in REI, even in some relevant rules and provisions securitization has not been mentioned, this is bound to increase the implementation difficulty of the real estate securitization. The design flaws of policies and regulations can be issued to set up special regulations to

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cover, such as "Real Estate Mortgage Bonds Regulations" and other related laws and regulations. (Huang Liang, 2007)
3 The lack of a sound personal credit system. Banks issue individual

housing consumer loans, should not only review market prices of the purchased housings by borrowers, but also seriously review the borrower's credit status to ensure that borrowers have good credit and strong debt-servicing capacity, thus to lay foundation for Mortgage Loan securitization. Because at this stage there is no real sense of the personal credit system, banks hard make accurate judgments on the personal credit status of borrowers and evaluate the loan risks for the personal credit. So, banks have to strictly control the loans for reducing the loan risks. As a result, it virtually restricts the expansion of the scale of consumer credit business, while the mortgage loans with small scale have no practical significance for of the implementation of the securitization in the primary mortgage market. To this end, it should establish a series of personal credit system, including personal credit registration, evaluation and risk records and avoidance, and implement dynamic monitoring and tracking investigations to the conditions of borrowers employment, income changes and property changes. This will be advantageous for banks to expand individual housing consumer loans and promote the purchase needs of urban residents. In the long-term run, the securitization of Housing Mortgage Loan needs to be guaranteed by personal credit system. (Jiang Bo, 2007) Third, the measures and policy recommendations for accelerating the real estate securitization Establishing a unified nationwide real estate securitization market, the aim is to make the REM and the capital market abutting joint. Through securitization, it makes regional characteristics of real estate investment
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dilute to enhance the liquidity of their investment, which let foreign investments enter the REM from the capital market, in order to achieve the purpose of attracting foreign investment. In view of the present situation in China, this paper recommends the following measures to promote China real estate securitization:
1 Implementation of the separability and securitization of real estate

equity. As a material form of real estate itself, it cannot points, but as an asset equity structure, it must be able to segment, transact and transform, and these rights and interests must be adopted by the form of security. (Meng Ren, 2008) In this way, after REM changed in the form of securitization, the securities of investors holding are essentially a part of real estate interests and rights, the transactions of security has become essentially real estate property change. Introducing property law as soon as possible and clearing the Property Law implementation, which will makes property rights and interests clear and protects the real estate rights and interests for investors and owners. Based on the clear rights and interests, the real estate securitization can be realized.
2 Standardization of real estate mortgage bonds. The supply agencies of

issuing real estate mortgage bonds, in accordance with interest rate and term etc. to pool and restructure mortgage debt, and then sell by to standard form of bonds. This makes the repackaging new product be sold with no difference among the units and make easily estimate by appropriately lowering the investment risks. (Chen Jia, 2005)
3 The segmentation of investment. By attracting large institutions such as

pension funds and investment funds, the great-number and long-term units get long-term stable investment vehicle. Through small units, it makes many investors have the ability to invest and establish their own unit of investment number, and reduces investors investment costs for
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researching credit information. So the small and ordinary residents can get opportunities to invest in REM. (Li Lei etc., 2006)
4 Government intervention. In accordance with international experience,

the government forces play a significant role in the mortgage loan securitization in REM and secondary market mortgage loan growth. Government can guarantee with the public credit to provide mortgage insurance (including principal protection and guarantee of the repayment schedule), significantly reduced default risks caused by difficulties of the investors credit guarantee, and makes the main institutional investors increase willingness to invest in real estate mortgage claims.(Huang Liang, 2007) In summary, the securitization of REI greatly reduce the liquidity risk of the financial institutions in issuing residential mortgages, which significantly breaks the bottlenecks in bank issuing long-term mortgage loan, and will greatly expand the scale of mortgage loan, while it will create extremely favorable conditions for lowering interest rates of loans. In the loose-money market, the plenty of loanable funds will reduce the proportion of buyers down payment; low financing cost will reduce financial pressure to make people easier access to long-term credit at low cost, thereby it increases the purchasing power, to further stimulate the effective demand of housing market and to promote the housing industry into a virtuous circle as soon as possible, and truly become the new economic growth point. 5.2. The measures taken inside REI From the enterprise point of view, it needs to see the potential problems of market extrusion and competition, industrial control and monopoly, and technical constraints and traps etc. of foreign investor in REM, and take
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full advantage of the learning effect, cooperative effect, demonstration effect, force effect and improvement effects of foreign investors in China REM. China enterprises should both compete and cooperate with foreign investors, and strive for win-win results.(Wang Yong, 2010) 5.2.1. The learning effect (Zhang Wenguang, 2006) Foreign investors often enter China REM with strong capital, technology, marketing and property management etc. Foreign advanced idea and management patterns require the domestic real estate development enterprises to use advanced technology and equipment and innovate management mechanism and management concept through the study, to reduce the cost and improve the quality of the product, and change the generally inefficient management in China REI, strengthen the competitive power of enterprises, then produce out the real estate industry products with high level and more suitable for consumption demand. 5.2.2. The cooperative effect (Zhang Wenguang, 2006) China's real estate development enterprise mainly rely on bank lending money, so the asset-liability ratio is high and interest burden is heavy. The uniformity and high risks of enterprise businesses often make the performance appear fluctuations. In this case, the Chinese real estate enterprises seize the opportunity of foreign investors entry, and actively seek overseas strategic partners, or utilize the advantages of good performance in overseas real estate group company, then take the way of strong combination to realize backdoor listing and seek the overseas support to enlarge enterprise financial strength. 5.2.3. The demonstration effect (Zhang Wenguang, 2006) Foreign real estate enterprises grow up in the long-term market
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competition and have strong market awareness; therefore, before they do investment decision-making or choose target market, there must be a careful market survey, but not copy the experience from the home country or other countries. When foreign investors supplant Chinese enterprises and occupy the REM share with abundant experience, they also demonstrates how to adapt to the market survival and development for Chinese enterprises, through the action demonstration enhance

modern estate product consciousness, strategic management and brand awareness of REI for China real estate enterprises. 5.2.4. The force effect (Zhang Wenguang, 2006) There are some problems on small scale, little capital, poor service and low qualification etc. in Chinese real estate enterprise during long term. They are at a relative disadvantage, the ability of market competition and resisting market risks cannot catch up with foreign real estate enterprise. In some degree, the entry of foreign investors determines whether Chinese real estate enterprises can be talent showing them in the competition of survival of the fittest. 5.2.5. The improvement effect (Zhang Wenguang, 2006) The improvement by foreign investors to China's real estate enterprises on assets quality has two main ways: one is "one package of creative Investment", namely with funds investing, their concept, management, technology, marketing and marketing network etc. will then also move to China's enterprises to improve asset quality; the second is the assets reorganization effect , tangible capital investment by foreign investors can make China real estate enterprise original assets from death to live assets, from the low- efficiency assets into high-efficiency assets. The investment of intangible assets provides China real estate enterprises well-known
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brands, the marketing network and domestic sales channels, and can save lots of idle assets.

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Chapter 6: Conclusion As prices rising unemployment, during three years, the national macro-control, especially in 2006, has further strengthened, but overseas funds have been rushing to pour into the China REM. Meanwhile, the discussion of foreign investment pushing up house prices and the worry of hot money leading the financial risks is growing, and the entry scale of foreign investment and M&A has been increasing; therefore, for improving their own thinking, it is necessary and inevitable for China to strengthen the awareness of foreign capital and the management of foreign investment in China, and introduce policies to limit foreign investment. (Ashley M. Howlett, 2008) But the government should also create the good investment environment to some foreign funds that are good for the market, and also train and develop local enterprises; it is believable that these are the challenges and important subject for the government to deal with. This paper conducts a number of theoretical and practical studies to health and orderly development of REI; I hope this paper can provide some significant advice for the healthy development of China REI. But as personal ability is limited, there are inevitable mmature and

imperfectionsthe in the analysis. For example, in the analysis of the negative impacts from the entry of foreign capital to the development of China REI, there are two other effects: first, impact the effectiveness of China credit policy. After June in 2003, under the influence of China take the tighten credit policy in REI, domestic real estate companies have turned to use outside financing to solve financial shortage. As the role of foreign capital, the effectiveness of a series of financial policies in REI received a considerable degree of limit. Second, cause the loss of state tax revenue. In the currently Foreign Enterprise Income Tax to

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foreign-invested enterprises in China, there are a series of tax incentives. China policies continue restrictions on real estate development and investment, while there are not supporting measures to foreign investors. On the contrary, in "Guidance Catalogue for Foreign Investment Industries (2007 revised)", which stipulated to put the real estate of involving residential development and construction in "encouraged" catalogue of foreign investments, which brings them more tax law concessions. Foreign real estate enterprises get benefits in China, while the state's tax revenue losses. With the impulse from local governments to attract investment, the foreign real estate investment get a number of preferential policies, which further exacerbates the loss of state tax revenue. On a positive impact, it ignores the role of foreign investment in the provision of high quality real estate products to meet the needs of consumers. Overseas real estate development enterprise have abundant funds, advanced technology and development philosophy, and a mature management system, to make more scientific and rational decisions, and do more full of humanity in planning, design, development, property services and other sectors in REI, so they can provide domestic consumers with high-quality real estate products, meet needs from people on quality work environment and residences. (Zeng Li & Zhan Wang, 2010) With China's economic and social development, the problem of REI in the introduction and utilization of foreign investments will constantly spring up. Along with Chinas continuously enhancing ability to handle the socialist market economy, and real estate enterprise's development and mature, it can be believed that all the problems will be effectively solved.

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Figure

1. Contribution of REI development of GDP in China, 1998 2007

http://www.marketoracle.co.uk/images/2009/Oct/jmotb101509image001_ 2111AAB9.jpg 2.

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http://cdn.creditwritedowns.com/wp-content/uploads/2009/10/china-real-e state
3. Monthly foreign investment in China REI, 2008 2009 (REM: billion)

http://www.researchinchina.com/UpLoads/Article/201001/2010032504.gif 4.

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http://static.businessinsider.com/image/4bd54a2c7f8b9aff61320a00/chart. jpg
5. The net income in real estate in Chinese major regions in China in 2001

http://www.kotlermarketing.com.cn/upload/20070425009.jpg 6. The house prices change from Nov. 2008 to Feb. 2010

http://www.thomaswhite.com/images/explore-world-new/BRIC-spotlight/i mg-2010-china-real-estate-01.jpg 7. The bubble in China REI

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http://www.tradersnarrative.com/wp-content/uploads/2010/05/china%20re al%20estate%20bubble%20vacation%20homes%20EWI%20May%2020 10.png 8. Real estate securities total return index movement

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