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China Real Estate Market - Foreign Investment

By Xiannian Ye

This article is from realtor.org. Please contact the author with any questions.

According to a statistics from China's Ministry of Foreign Trade and Economic Cooperation (MOFTEC), the cumulative foreign investment in China at the end of 2000 totaled $348.3 billion, making it the world's second largest destination of foreign direct investment after the United States.

Source: Ministry of Foreign Trade and Economic Cooperation, PRC

Many China based companies invest via Hong Kong and Macao subsidiaries in order to capitalize on investment incentives, such as tax breaks, which are only available to foreign, not domestic, investors. It is estimated that Mainland Chinese funds flowing through Hong Kong account for 10-30% of Hong Kong's total realized FDI in China. In addition, many Taiwan firms invest in the mainland via Hong Kong and Macao in order to avoid the scrutiny of the Taiwan authorities. The above chart demonstrates the total realized foreign investment as of 1999 from top 10 countries/regions. It's no surprise to see that Hong Kong is ranked as the number one investor well ahead of other countries with almost U.S. $155 billion investment. U.S. is ranked number two with a total of $25.6 billion, about the same as the investment from Taiwan or Japan.

Based on a survey conducted by the U.S. Embassy in China, the lure of the China market - with over 1.2 billion potential customers, increasingly sophisticated middle class, growing industrial base and explosion of retail stores - stands out as the primary reason why U.S. companies invest in China.

Source: World Investment Report 2000, United Nation

China has also begun to allow greater foreign participation in some services industries. At the end of 1998, a total of 151 foreign bank branches, seven joint-venture banks, and five wholly foreign-owned banking firms in 19 cities obtained approval to operate in China. The State Council has recently allowed foreign banks in Shanghai's Pudong area to conduct local currency transactions on a limited trial basis. On the other hand, engineers and architects professionals seem to enjoy a relatively more cooperative and open relationship within the Chinese market. These professions have operated in China through joint venture operations with relatively few regulatory problems according to a U.S. Embassy survey.

In the services sector, however, foreign law firms and accounting firms have been more tightly regulated. The government has permitted the establishment of foreign law firms in designated cities on a case-by-case basis. As of February 1998, 93 foreign law firms have been issued licenses to practice in 15 cities in China. About one third of the 93 firms were from U.S. China has limited a law firm's practice to a single city and foreign attorneys are not permitted to employ Chinese lawyers or establish partnerships or form other types of associations with Chinese lawyers or law firms. Accounting services are almost as restricted. In accounting, the scope of activities for representative offices to consulting services is limited.


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