China Investment Guide

ABSOLUTE gUIDE SERIESto Investment Property

China

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ABSOLUTE gUIDE SERIES - CHINA

Date of Publication: November 2008© Obelisk

5. Welcome to ChinaDedicated to providing impartial information.

6. Economic Growth & Stability China’s gDP growth was 9.7% in 2008, with 9.3% predicted for 2009.

7. Currency & Banking China is holding its currency stable, shifting focus from countering inflation to sustaining growth.

8. Foreign Investment China was the highest recipient of FDI among developing countries in 2007.

9. Political Situation & Stability The Chinese Communist Party is the only party in government.

10. Tourism By 2020, China is likely to be the world’s largest tourist destination.

11. Infrastructure China made a vast range of infrastructure improvements in preparation for the 2008 Olympic games.

12 - 13. Property Market Beijing property increased by 11% in 2007.

14 - 15. Secondary MarketSalaries in China are expected to rise 8% in 2008.

16. Mortgage Market China has a very restricted mortgage market.

17. Market Risks China presents several market risks.

18. Purchase Process Foreign ownership of property is restricted.

19. Investment Costs Buying costs are generally low in China.

20. Summary China has seen impressive growth in its economy, tourism and infrastructure investment.

21. Verdict China is an investment option to be approached with caution.

22. Obelisk Advantage Obelisk approaches its projects purely from an investment perspective.

Contents

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Beijing

Urumqi

Lhasa

Harbin

ShenyangQinhunangdao

TianjinZhengzhouXian

Shanghai

Guangzhou

Chengdu

ChongqingNingbo

NanjingWuhan

Lanzhou

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As the market leader for overseas investment property, we are committed to providing cutting edge information for property investors, one aspect that has earned us the award of International Property Specialist 2008 by Business Britain magazine.

We are therefore pleased to present our latest Property Investment guide to China, an essential tool for the investor planning to buy property in this country. This guide forms part of the Obelisk Absolute guide Series, dedicated to providing impartial information about numerous investment destinations worldwide.

At Obelisk, we are only too aware of the importance of extensive research into an investment destination and, as part of our policy to offer investors the definitive service, this guide has been rigorously researched to provide you

with in-depth, clear-cut knowledge on the most important factors influencing your property investment decision in China.

In this guide you will find recent economic performance and predicted growth, a profile of the current property market and its future potential, along with tourism trends and infrastructure improvements. The guide also includes information about China’s mortgage market, the buying process and buying costs.

Obelisk’s Absolute guide to China offers investors objective and authoritative information to facilitate an informed decision about investing in China. We trust that you, as an investor, will find this guide indispensable.

Here’s to Successful Investing!

China forms part of the Obelisk Absolute Guide Series, dedicated to providing impartial information to numerous property investment destinations worldwide.

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to ChinaWelcome

Economic Growth

& StabilityFollowing major economic reforms in the late 1970s, China’s economy has become increasingly more market-orientated, with a rapidly growing private sector. The government is firmly committed to reform of state industries, which it has achieved by large-scale privatisation of unprofitable enterprises and a reduction in government bureaucracy. The resulting efficiency gains have contributed to a more than tenfold increase in gDP since 1978.

China’s gDP growth was 9.7% in 2008, with 9.3% predicted for 2009, slipping for the first time in 4 years due to the international slowdown. However, it is expected to remain impressive, slowing from 11.9% in 2007 to 8.2% in 2012. The Economist Intelligence Unit

expects domestic demand to remain strong in 2009-2013 as consumption is boosted by strong wage growth.

Inflation is forecast to decrease from an estimated 4.2% in 2008 to an annual average of 3.8% from 2009 to 2010. Rising utility costs will be offset by low food and consumer goods inflation. Unemployment figures are also down from 4.2% in 2007 to 4% in 2008.

Standard & Poor’s raised China’s credit rating to A+ from A with a stable outlook, commenting that the government’s improving balance sheet will offer greater resilience to a potential sharp economic slowdown.

GDP Growth (2008): 9.7%

GDP Per Capita (2007): US$5,483

Inflation (predicted 2008): 4.2%

Unemployment (predicted 2008): 4%

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ABSOLUTE gUIDE SERIES - CHINAABSOLUTE gUIDE SERIES - CHINA

The Chinese currency is the renminbi (RMB), also referred to as the yuan (CNY). After many years of being pegged to the US dollar, China revalued its currency in 2005, moving to an exchange rate that references a basket of currencies, primarily those of China’s main trading partners.

China maintains its currency stability in order to support its export-led economy, a policy that has received international criticism. Interest rates were cut to less than 7% in October 2008, in an attempt to revive slowing economic growth. The limited exposure of the economies of East Asia-Pacific Central Banks to foreign troubled assets has helped to reduce the negative impact of the financial crisis on Chinese institutions and markets.

Currency

& Banking

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Foreign Investment

Foreign Companies Investing in ChinaCarrefour, General Electric, General Motors, Intel, McDonald’s, Tesco,

Wal-Mart

China was the largest recipient of foreign direct investment (FDI) among developing countries in 2007 and 6th in the world with inflows of US$83.5 billion, ahead of Hong Kong, Singapore and India.

Foreign investment in China continued to grow in 2008, reaching $27.4 billion in Q1, a 61.26% year-on-year increase according to government sources. These figures show that China remains an attractive market for multinationals because of its large market, vast manufacturing capacity and relatively low costs. Inflows of foreign research and development investment have also increased strongly in the past years, and funding from foreign firms based in China and abroad is estimated to account for 25% of business enterprise.

The government closely monitors international financial institutions to minimise the effects of the global credit crisis on China, currently insulated from the economic downturn.

Economists believe that the growing strength of the Chinese market will make it more resilient to the recession in the West.

International companies and foreign investors whose trade from their traditional consumers has decreased have shown strong interest in selling to China. Banks, unwilling to lend in Europe and the US, are increasingly investing in China and the country’s debt allocation expanded 15% during 2008.

21st century China is showing a changed image with the government prioritising private consumption and encouraging consumer spending and loans. Modern China has its fair share of billionaires, 5-star hotels, futuristic skyscrapers, designer shops, Michelin-starred restaurants and luxury cars.

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The People’s Republic of China was founded in 1949 under one-party rule by the Chinese Communist Party (CCP). Today, the CCP continues to be the only party in government. It is the world’s biggest political party and retains its monopoly on power.

The Chinese president and a vice-president are approved by the National People’s Congress (NPC). The current President is Hu Jintao, re-elected in 2008 and the general secretary of the CCP. The prime minister is Wen Jiabao and the CCP’s policy making body, the politburo, sets policy and controls all party appointments.

China welcomes foreign investment, although this is carefully monitored and the impressive rate of economic change has not been matched by political reform.

Political Situation

& Stability

WTO Member: Since 2001

Political System: Single party system

Ruling Party: Communist CCP

Next Presidential Nomination: March 2013

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TourismIn 2007, China welcomed 131 million visitors, of which 26.11 million were foreigners with 6.2 million from Europe. According to the World Travel and Tourism Council (WTTC), real gDP growth for China’s Travel & Tourism (T&T) economy is expected to be 11.3% in 2008 and to average 8.8% a year over the next 10 years. The contribution of tourism to employment is expected to rise from 9.6% to 12% by 2018.

The 2008 Olympic games in Beijing changed the face of tourism in China. In the lead up to the Olympics, Chinese tourist industry officials focused on opening hotels and building infrastructure in preparation for the games. In 2010, China will host the World Expo in Shanghai and the government believes this will provide a further major boost to Chinese tourism.

By 2020, China is likely to be the world’s largest tourist destination. The WTTC currently ranks China in 2nd position out of 176 countries in terms of tourism size, with tourism growth forcast to remain in 2nd position for the next decade.

Visitor Numbers (2007): 131 million

Tourism Contribution to GDP (2008): 12.2%

Tourism Contribution to Employment (2008): 9.6%

World Ranking: 2/176 countries

(tourism size)

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InfrastructureBeijing’s Capital International Airport, costing around US$3.75 billion

Between 2006 and 2010, US$200 billion will be spent on railways

World’s largest shopping mall opened in 2005

China’s rapid economic growth has put a considerable strain on its infrastructure and it has recently invested large sums on transport. Between 2001 and 2005 more was spent on roads and railways than in the previous 50 years and it is expected that investment will see annual double-digit growth until 2010. Between 2006 and 2010, US$200 billion will be spent on railways alone. Work began in 2008 on a high speed train which will link Beijing with China’s financial capital, Shanghai.

China made a vast range of infrastructure improvements in preparation for the 2008 Olympic games, the most

impressive being Beijing’s Capital International Airport, which, with the addition of the new Terminal 3, is the world’s largest building and the 9th busiest airport in the world. Taking 4 years to build and costing around US$3.75 billion, the airport covers an area of 14 million square feet and is expected to cater for 50 million passengers annually by 2020.

China has numerous shopping malls, including the world’s largest, the South China Mall, costing US$312 million.

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China’s capital, Beijing, has undergone a rebirth with major investment happening in transport and infrastructure, retail, residential and commercial property.

Capital Growth (2008): 9.2%

Average Annual Rental Yield (2007): 7.78%

Property MarketKnight Frank, in their 2008 International Residential Review, report that the Chinese property market is experiencing huge change as a consequence of its economic transformation and claim that “the potential impact of this emerging global wealth has barely begun to be felt in the residential market.” Returns on investment have been high in recent years, with foreign investment flooding into the Chinese property market and according to Knight Frank, year-on-year growth in September 2008 was 9.2%.

growth has slowed slightly, which experts attribute to government restrictions on mortgage lending and foreign investment introduced in 2006 to prevent over-investment and excessive construction. There are restrictions on foreign ownership to prevent investor speculation – foreigners may buy only one apartment and must prove they have worked or studied in China for a minimum of 1 year.

Foreigners or foreign institutions are permitted to share ownership with a Chinese partner.

A Jones Lang LaSalle report says that China’s capital, Beijing, has undergone a rebirth with major investment in infrastructure, retail, residential and commercial property. The outlook for Chinese real estate and property appears positive with over 70 Chinese cities showing year-on-year increases. Beijing’s property price history looks impressive, with an 11% increase in 2007 alone, although this high rise may have been influenced by the Olympic games.

China had the world’s 8th highest rental yields in 2007 at 7.78%, with yields on apartments in the 5 main cities - Beijing, Shanghai, guangzhou, Shenzhen, and Chengdu – slightly lower at around 5%.

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Secondary

MarketIt should be noted that foreign investors, both individuals and companies face certain restrictions when buying Chinese property for letting or investment purposes. These restrictions are detailed in the purchase process.

Rental yields are generally good and averaged 7.7% in 2007. China has a pro-landlord rental market, although foreigners are not permitted to be landlords.

Salaries in China are expected to rise 8% in 2008, more than the 7.3% average forecast for the Asian region and well above the global average of 5.9%.

Although a large proportion of China’s population (over 1 billion) lives in poverty, the stronger and more market-orientated Chinese economy has led to the emergence of a growing middle class, whose increased affluence will eventually lead to further demand for property.

Construction of private properties expanded in 2007 and increased by 47% in October, although this rate slowed by 21% in June 2008 indicating a slowdown in supply. However, this may lead to increased demand for housing due to rental demand and rises in household income.

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Average rental yields in the 5 main Chinese cities are around 5%.

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Mortgage Market

Mortgage lending is restricted in China as part of the government’s anti-speculative measures intended to cool down the housing market. In addition, several interest rate rises had a major impact on the mortgage market. A mere 2% of homes are bought with mortgages in China and there are currently no equity release products on the market.

It is generally difficult for foreigners to secure a loan from a local bank, although it may be possible through a local branch of an overseas bank. Access to mortgages for foreigners varies depending on the city. For example, in Shanghai, foreigners can buy off-plan or resale property with a 40% down payment and a 60% mortgage, and in mid-2008, some Shanghai banks offered a 70% loan.

Payments for property must be made from a local bank account and transferring funds from an overseas bank account is subject to taxation. There are also formalities regulating foreign exchange and individuals who send capital to China from abroad.

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Market RisksProperty investment into emerging markets may carry some degree of risk. However, the degree that market risk in a particular country affects a property investment depends largely on thorough due diligence conducted prior and during the purchase process.

Although China is the world’s most populated country and a fast-emerging economic power, the fact that it is not a democracy means that China’s integration into the world political system is likely to cause tensions with other world powers such as the US. Relations with Japan have also been traditionally difficult, although these have recently improved. China’s occupation of Tibet is a further international issue.

China faces several economic development challenges such as sustaining employment growth for millions of job seekers, reducing social inequalities, containing environmental damage and reducing corruption. gDP growth has also slowed after 5 years of double-digit increases, although financial experts believe that the 9% growth in Q3 2008 is still extremely high by historical standards.

For the foreign property investor, China has a young property history and assessing the property market is not easy due to the lack of reliable official information. There are also issues concerning foreign ownership, currently restricted. According to CB Richard Ellis, “the ‘wait-and-see’ attitude is becoming increasingly popular in the residential market.”

For the foreign property investor, China has a young property history and assessing the property market is not easy due to the lack of reliable official information.

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Purchase Process

Below is the standard purchase process in China and issues that may affect a property purchase:

Foreign ownership of property is restricted in China. Foreigners are not permitted to own land and may only buy 1 apartment, which must be for personal use. In addition, they must hold a residence permit and prove that they have worked or studied for a minimum of 1 year in China. Property ownership is also possible through a Chinese company. Non-Chinese citizens are not allowed to let property.

A Property Purchasing Registration Form and Property Selling Registration Form must be completed and filed along with a Property Ownership Certificate at the Real Estate Transaction Department. Once this is done, the Department fixes a date for transfer of ownership.

The transfer of ownership is finalised at the Real Estate Transaction Department.

Chinese laws and legal processes may be very different from what you are used to and Obelisk strongly recommends that independent legal advice be taken during a property purchase. This is particularly important since laws regarding property ownership in China are subject to frequent change.

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Investment Costs

The costs of a standard property purchase in China may include the following:

3% deed tax (paid by the buyer).

2% maintenance taxation.

0.1% stamp duty (buyer and seller both pay 0.05%).

Capital gains tax (CgT) is levied at the rate of 20% on individuals and at 25% for companies. However, these rates are higher when the profit from a sale of real estate exceeds certain thresholds – for example, when the capital gain is over 200%, CgT is levied at 60%. Annual property tax is levied by the municipality and is calculated according to the rateable value of the property.

Chinese taxation is complex and subject to change. You are therefore recommended to take expert and up-to-date advice on taxation issues affecting the purchase and ownership of property in China.

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SummaryChina’s economy has seen a more than tenfold increase in gDP since 1978.

China cut its interest rates to 7% in October 2008 in order to revive economic growth.

China was the largest recipient of FDI among developing countries in 2007 and 6th in the world.

FDI in Q1 2008 saw a year-on-year increase of almost 62%.

The People’s Republic of China is ruled by a one-party communist regime.

The Beijing 2008 Olympic games provided a major boost to Chinese tourism and China is expected to be the world’s largest tourist destination by 2020.

Investment in infrastructure will see double-digit growth until 2010.

The Chinese property market is experiencing huge change as a consequence of its economic transformation.

The year-on-year property increase in September 2008 was 9.2%.

Rental yields are generally good, although foreigners are not permitted to be landlords.

The mortgage market is limited and only 2% of property purchases are made with mortgage.

The Chinese government currently faces several important economic challenges.

Foreign ownership of land is not permitted and ownership of property is very restricted.

Purchase costs are low, but capital gains tax is high.


The following summary provides key highlights to consider when investing in China’s property market:

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Although the Chinese property market has enormous potential and returns on investment have been high in recent years thanks to the country’s economic transformation, significant barriers remain for the overseas property investor.

These barriers include high rates of CgT for both individuals (20%) and companies (25%). There is also a range of restrictions for foreign investors including restricted ownership, although this is possible through a Chinese company.

Due to these investment barriers, Obelisk recommends that investors take expert legal advice before considering any purchase. Although Chinese property investment may have considerable future potential, Obelisk currently advises extreme caution.

Based on thorough research we have carried out on China, we at Obelisk believe that China does not present a viable investment opportunity at present, although this may well change in the future. Capital growth is good but the investment barriers outweigh the advantages for the foreign investor.

Verdict


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The Absolute guide Series Rating

Based on our extensive research, Obelisk has introduced a 5 star rating system to summarise the investment potential of a country. The availability of finance, economic stability, political stability, the strength of the local market to provide an exit strategy and the potential to earn from investment are the key criteria that determine the investment grade of each country.

Obelisk AdvantageVoted International Property Specialist of the Year 2008 by Business Britain magazine, Obelisk has been recognised as the authoritative voice within the industry and its clients benefit from the company’s uncompromising high standards and professionalism.

Obelisk has identified a simple and transparant purchase process for its clients as a simple, four step process:

The client chooses and reserves the unit that best suits their investment requirements, and Obelisk takes the client through a compliance procedure.

An independent lawyer, sourced and appointed for the client by Obelisk, will have already carried out full due diligence on the project. They will issue all purchase contracts and paperwork to the client.

On receipt of this contract, the client will sign and make the first payment. The lawyer will notify the client of all further payments when required.

The appointed lawyer will also represent the client in all aspects legally required within the country of purchase, ensuring that clients of Obelisk enjoy the benefits of simple and hassle-free real estate investment.

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For more information about Obelisk’s investment opportunities in China, contact us now on [email protected],

visit our website at www.obeliskinternational.com or call us FREE on 0808 160 0670 (UK) or 1800 932 514 (IRE).

Awards Obelisk ‘International Property Specialist 2008’

DisclaimerThe material contained within this document has been prepared for information purposes only. Information contained herein is not to be relied upon as a basis of any contract or commitment. The information is not to be construed as an offer, invitation or solicitation to invest and opinions expressed are based on market conditions at the time of print and may be subject to change without prior notice. Information contained herein is believed to be correct, but cannot be guaranteed. In case of queries or doubt you should consult an independent investment adviser. No personal recommendation is being made to you and the past is not necessarily a guide to the future.

The brochure in its entirety – text, images, marks, graphics, logos, buttons, combinations of colours, and the structure, selection, ordering and presentation of its content – is protected by the legislation on intellectual and industrial property, it being forbidden to reproduce, distribute, publicly disseminate or transform it, except for personal private use. It is also forbidden to reproduce, relay, copy, assign or broadcast, in whole or in part, the information contained in this brochure, for whatever purpose and by whatever means, without written consent.

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