China to Ban Foreign Investment in Villas

China is to ban foreign investment in the construction of villas, apparently part of government efforts to cool the real estate market.

To tame record-high home prices and control inflation, the government has tightened bank lending to domestic property developers and introduced a long-debated property tax in Shanghai and Chongqing.

Planned revisions to the Catalogue Guiding Foreign Investment in Industry listed foreign investment in the construction and management of villas in the "prohibited" category. It was previously in the "restricted" category.

"There will be some impact, but it will not be very big," said Albert Lau, managing director of Savills Shanghai. He said foreign exchange curbs and difficulties in acquiring land already limited some foreign investment in villas.

David Ng, an analyst at the Royal Bank of Scotland, said "This is just a gesture you see from time to time. Supposedly if you want to cool the market, you should increase the supply. It is counter-intuitive to try and limit money going into the sector."

The state planning National Development and Research Commission and the Ministry of Commerce announced the planned revisions late last week to solicit public opinion via email before the end of April.

The guidelines, last revised in 2007, also listed domestic mail express delivery in the "prohibited" category, in what appeared to be a formalisation of already-existing curbs on foreign investment.

China's parliament approved in 2009 a postal law that allows only China Post -- also the industry regulator and pricing authority -- to deliver letters and documents posted within China, cutting out foreign firms such as FedEx Corp , United Parcel Service Inc and DHL Worldwide Express BV .

Alternative-fuel cars, one of seven strategic industries that the government hopes will turn the world's second-biggest economy away from its role as a supplier of cheap goods, were added to the "encouraged" category.

Generally, industries in the "encouraged" category can receive preferential tax rates and other incentives. Those considered "restricted" face a higher bar for approval.

The new rules will make it more difficult for foreign firms to enter sectors that Beijing is trying to rein in and marks the latest policy initiatives by the government to restructure its economy and direct investment to priority sectors.

The U.S.-China Business Council had recommended the government move the real estate secondary market to the "encouraged" category and allow foreign majority-controlled ventures and wholly foreign-owned enterprises to participate.

Global real estate consultant Jones Lang LaSalle said last month foreign players were unfazed by China's policy tightening spree and returning to invest in troubled domestic developers or buy distressed assets. [ID:nL3E7ET21Y]

Foreign investors outside Asia accounted for a record 33 percent of China property investment in 2007. That more than halved in 2008 to 12 percent, before falling to a mere 2 percent in 2009. The ratio has recovered slightly since, rising to 7 percent last year, Jones Lang LaSalle said.

The new guidelines, in Chinese, can be found at (Additional reporting by Langi Chiang in Beijing and Lee Chyen Yee in Hong Kong; Editing by Matt Driskill)