China Real Estate Market

¡ñ Introduction
¡ñ Economic Development
¡ñ Foreign Investment
¡ñ Housing Reforms
¡ñ Real Estate Market
¡ñ WTO Entry and Its Impact
¡ñ Laws and Regulations Concerning Land and Real Estate
¡ñ Administrative Agencies Affecting Real Estate Businesses
¡ñ Taxation System
¡ñ Mortgage/Home Loans
¡ñ Foreign Business Establishment
¡ñ Conclusion
¡ñ Resources

Introduction
To some foreign companies, doing business in China is very difficult. Besides the language and cultural difference, the concerns facing foreign businesses may range from the not-so-transparent laws and regulations, the bureaucratic agencies, to the complicated taxation system. Despite these problems, China has made a huge progress forward since it opened its door to the outside world in late 1970's and embraced a market-oriented economy after being ruled under the central controlled system for almost 30 years. Few people in China would have thought about owing their homes ten years ago. Now, with a private home ownership approaching to 60 percent in urban area, China is perhaps the most successful country in the world to have developed a private housing market in such a short period of time. This article is intended to help foreign-based real estate practitioners better understand China and the Chinese market. Issues such as China's economic development, WTO's accession, laws/regulations, mortgages/loans, business forms, government agencies, and taxation system, etc. are addressed along with some statistical data from various resources.

Economic Development
Shortly after the new government was founded in 1949, almost all of China's private or individual-owned farms were collectivized into large communes. Private ownership of housing in the urban areas was nearly extinguished. In order to support the fast industrialization, the central government invested heavily in the 1960s and 1970s. A large share of the country's economic output was arranged and controlled by the government. It set production goals, controlled prices, and allocated resources throughout most of the economy. As a result, by 1978 nearly three-fourths of industrial production was manufactured by state-owned enterprises (SOEs) based on centrally planned output targets. Private enterprises and foreign invested firms were nearly non--existent. One of the central government's major goals was to make China's economy self-sufficient.

Foreign trade was generally limited to obtaining only those goods that could not be made or found in China. Only a handful of countries that had good relationship with China could participate in foreign trade. Though China's real GDP grew at an estimated average annual rate of about 5.3% from 1960 to 1978, the economy was almost inactive due to the huge population base and absent competition. In addition, the economy was inefficient since there were few profit incentives for enterprises and workers. Price and production controls also caused widespread distortions in China's economy.

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.

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.

Housing Reforms

Until 1999, most of people in China's urban area had lived under the welfare housing system in which the government provided nearly free housing for urban residents. All employees from government agencies, academic and public institutions, state owned companies, received allocated housing from the government or their work units. In March 1998, Chinese Premier Zhu Rongji introduced a package of reforms that included a series of housing reforms -intended to stimulate the domestic economy. He declared that subsidized housing traditionally available to Chinese workers would be phased out and that workers would be encouraged to buy their own homes or pay rent closer to real market prices. The reforms called for workers to use their savings, along with the one-time housing subsidies they receive, to purchase their own houses. The government announced in August 1999 that all vacant residential housing units built after January 1, 1999 were to be sold, not allocated. Since then, the private housing market has experienced tremendous growth.

Actuated investment in China's real estate development in 1999 was reportedly at RMB $401 billion (about U.S. $48.43 billion), up about 10 percent from 1998. From January to November of 2000, the total investment in the real estate sector has reached 374.4 billion RMB (about U.S. $45 billion). Meanwhile, 410 million square meters (4.41 billion square feet) of residential housing were built in 1999, an increase of 19.6 percent from the previous year. China Securities, a Chinese magazine reported that China would build 486 million to 549 million square meters (5.23 billion to 5.91 billion square feet) of new residential houses every year during the first 20 years of the 21st century. In 2000, commercial housing construction has increased 17.9%, finished construction area increased 22.3%, sales volume increased 38.8%, and housing purchase increased 44.5% over the same period in 1999.

Xie Jiajin, the director-general of the Department of Housing and Real Estate in the Ministry of Construction, reported at the January 9, 2001 National Housing Reform Conference, that over 80 percent of the allocated public housing in China have already been sold to workers or employees. A new property ownership structure dominated by the private ownership along with other types of ownership forms has taken root in China.

A study completed by the Sinomonitor and the British Market Research Bureau (BMB), indicated that from 1999 to 2000 the percentage of homeowners in China urban areas rose nearly 10 percent, from 49.9 percent to 59 percent. There is no doubt that the housing reform in recent years has boosted home purchase and construction in China.

Real Estate Market

Compared with U.S. and other developed markets, China's real estate industry is less experienced and immature. Currently, there are approximately 25,000 real estate brokerage agencies employing over 200,000 agents. In addition, an estimated 20,000 property management companies employing over 2 million people exist in China. Many of the brokerage companies, however, may not possess business licenses and qualification certificates. For instance, it was reported that, of the 4,000 real estate agencies currently operating in Beijing, only about 700 have business licenses. In a recent inspection in Shanghai, 982 real estate brokerage firms were found guilty of operating without registration with the appropriate government agency.

The government has received many complaints about real estate malpractices in recent years.Among them are misleading advertisings, low quality housing sold at a premium price, delayed transition of sold properties, etc. A survey by Guizhou Property Exchange Center discovered that many consumers were very disappointed by the poor services they received from the real estate agents in Guiyang City, the capital of Guizhou province with a population of 1.36 million. Prospective home shoppers and renters indicated they were reluctant to use the agents' services because of the bad experiences.

During the middle and late 1990's, real estate markets in big cities were overheated. Price of prime land in Beijing has fallen from the highs experienced in the boom development period of the early 1990s. In 1999, the vacancy rate for Grade A buildings was 30% in Beijing and 38% in Shanghai. Some experts estimated that the vacant space might take two to three years to be absorbed if the recent trends in demand continue. The market now seems to be picking up the momentum when many residents are upgrading into bigger housing.

A research report by Shanghai Real Estate Economic Association for the preparation of WTO entry cited that, in comparison with companies in developed countries, China's local real estate companies have the following weaknesses: 1.Lack experiences because of short history; 2. Limited competing capability due to smaller sizes; 3.Insufficient capital and backward marketing means; 4.Lower management skills; 5.Not service-oriented in general.

To regulate the market and protect consumer's interest, the government released the revised Model Commercial/Commodity Housing Purchase/Sell Contract in September 2000. The model contract serves as a standard contract and allows potential real property buyers and sellers to understand what are involved in a real estate transaction. The government hopes it will eventually help consumers reduce the risk in home purchase.

The overall real estate market in China is dynamic and grows fast in terms of capital flow and development speed in spite of the problems. The resale housing market is almost non-existent in China a few years ago. In 1999, the government completed its basic policy for secondary housing market and encouraged urban residents who owned their homes to sell smaller, older, and low-quality houses in exchange for bigger, newer, and high-quality ones. Some cities, e.g. Shanghai and Ma Ansan of Anhui province started to experiment the secondary market earlier than other cities in China. Since 1996, there have been 67,333 residential properties being put for sales on the market in Shanghai, accounting for about 5% of the total sold properties there in the same period. In 2000 alone, about 7.5 million square meters (80.73 million square feet) existing houses were sold in Shanghai. The total transaction amount was valued at RMB 65.6 billion (about U.S. $8 billion). There are over 5,000 foreign funded real estate companies, including China-foreign joint ventures (JVs) or cooperative enterprises, and over 1,000 wholly foreign-owned companies currently operating in China. Hong Kong is the top investor, accounting for over 75% of total foreign investment, followed by the United States and Taiwan. The following chart shows the amount of total foreign investment in the Chinese real estate market in recent years. There was a drop in investment in 1997 and 1998 that could be attributed to the Asian finance crisis and over heating of the real estate market in late 90's.

The housing industry has become a powerful engine behind the rapid economic development in China and contributed about 1.5 percentage points to 1999's 7.1 percent economic growth.

U.S. government and companies have participated in the development of the Chinese housing market. In 1999, President Clinton called on the Department of Commerce to send U.S. experts to China to discuss how to build a stronger housing finance system by, for example, strengthening property rights and developing stronger mortgage markets. On November 1st, 2000, then U.S. Housing and Urban Development (HUD) Secretary Andrew Cuomo and Chinese Construction Minister Yu Zhengsheng signed an agreement in Washington. Both nations agreed to create a U.S.-China Residential Building Council (RBC), which was expected to provide new housing opportunities for families and to create housing industry jobs and stronger economy. The new Council would participate in activities that the U.S. and China undertake to exchange information and to cooperate on housing development.

The National Association of REALTORS?, the National Association of Home Builders, the Mortgage Bankers Association of America, Fannie Mae, the National Association of Housing, Redevelopment Officials, and other organizations and corporations are represented in this Council. Dennis Cronk, 2000 NAR president and a member of RBC, led a delegation and visited China in July 2000 and signed the Memorandum of Understanding with China Real Estate Association. The agreement called for the sharing of information between the two nations, related to the real estate industry and for each association to alternatively send a delegation to visit the other on an annual basis. In addition, both countries have agreed to enter into discussions to identify areas of substance where they can develop a U.S.-China relationship surrounding real estate professionals. In June 2001, NAR President Richard Mendenhall, led a delegation visited China and met with representatives from China Real Estate Association (CREA), the Society of Hong Kong Real Estate Agents, Limited (SHKREAL), and many real estate professionals from local and U.S. companies. The members of the NAR delegation included two former NAR presidents: Norman Flynn and Russ Booth; and David Michonski who serves as the Asian Regional Director for NAR. This visit greatly enhanced the mutual friendship and understanding among the three real estate organizations.

According to a survey reported in the China Construction magazine, about 59% of the urban residents in China now own their own homes. The average living space for most of urban residents who own their homes is 50-80 square meters (538-861 SF). The majority of households surveyed have 2 to 4 people. About 19.7% of respondents live in rented dwellings and 11.5% receive rental subsidies from their employers or work units. It was also reported that 21.9% of the residents surveyed indicated they would like to purchase new houses with a size of 70-150 square meters (754-1615 SF) within 5 years. Family savings were the main financing resources, which stood at about 6700 billion RMB (1 trillion U.S. dollars in 2000. However, government funding and bank loans were also among favorite options.

WTO Entry and Its Impact
China's expected accession to the WTO in late this year or early 2002 will have a positive impact on China's real estate market as a result of increased business activity and the more systematic development of China's economy. As China's economy grows, more and more people can afford cars and housing. This will not only provide enormous business opportunities to foreign investors, but also means that China will need to follow international practice standards. China will play an increasingly important role in the flow of international real estate investments, both outward and inward-bound though it is likely that the impact will be gradual and unevenly spread among different regions.

To address issues associated with WTO accession, Chinese lawmakers ought to either make new legislations and regulations, or change the current ones, so they can fit the new market requirements and situation. An estimated 1,400 laws and regulations need to be modified in order to keep in line with the WTO standards. Last November, a delegation sent by the China's Ministry of Construction visited Washington DC to learn the relevant laws and regulations in the U.S. This is where U.S. real estate professionals with more experiences and knowledge in real estate business can work with China's counterparts to create a market structure in China.

Traditionally, housing in China is segregated in two sectors. One is built and sold to foreigners, the other for locals. Though the quality and services may be higher for foreign purchasers, the housing is usually much more expensive. To be prepared for the WTO entry, the Ministry of Construction is currently working on creating new rules and eventually combines the two separate sectors together. A group of experts have studied the case and made some recommendations. For instance, they suggested the government should establish new rules governing land supply, price equality, rights and buyer qualifications to reach the goal of merging the segregated housing markets into a single one. They also suggested the government could consider to standardize the housing service sector in line with international practice in the hope of increasing competitiveness after China's WTO accession. Some discrimination against foreign nationals and exclusive foreign investments should be revised or removed. There is a great demand in China to build infrastructure and to provide more housing for the world's largest population. These needs translate into opportunities for U.S. companies to help provide such services using their experiences and knowledge. Though the resale housing market is still in infant stage, it will have a realistic potential to grow into a huge market in near future. With the fast-moving course of events in the Chinese economy, it is only natural to assume that more U.S. real estate companies, both development and brokerage firms, will sooner or later involved in the development of China's real estate market.

Laws and Regulations Concerning Land and Real Estate
China's legal system is a mixture of common law and continental legal systems, but it puts relatively less emphasis on legal precedents. The 1992 U.S.-China bilateral market access MOU committed China to publish all relevant laws, rules, regulations, administrative guidance and policies governing foreign trade. For instance, all international trade related laws and regulations could be located in the MOFTEC Gazette, the official register. Many of government ministries have also published digests of their regulations, either in hardcopy or on their websites. Real estate related laws could be located at http://www.cin.gov.cn/, the Ministry of Construction's web site.

It may make sense for U.S. businesses to have a general idea about what the related laws and regulations are before they enter China. Real estate laws and regulations are made by the following commissions and agencies: the National People's Congress and its standing committee, the State Council, Ministries and commissions under the State Council, local people's congresses and their standing committees, local governments, relevant supervisory and regulatory departments.

Under the 1982 Constitution, urban land in China is owned by the State and the collectives own the rural land. Since the local and central governments administer the rural collectives, it can be construed that all land ownership is under control of the State. However, the Constitution's Amendment Act of 1988 to Article 10 adopted on April 12, 1988, states that a land use right may be transferred in accordance to law. Based on this statement, a land use right becomes divisible from land ownership, thus making land use right likely to be privatized. Individuals, including foreigners can hold long-term leases for land use. They can also own buildings, apartments, and other structures on land, as well as own personal property.

Real estate sales in China take place in the form of transfer of right to use land. To obtain land-use rights, the land user must sign a land-grant contract with the local land authority and pay a land-grant fee up front. The grantee will enjoy a fixed land-grant term and must use the land for the purpose specified in the land-grant contract. Depending on the type and purposes of land use, the maximum term of a land grant ranges from 40 years for commercial usage, 50 years for industrial purpose, to 70 years for residential use. In fact, transfer of a land use right has accounted for most of the business activity in the primary real estate market in China.

The rules regulating real estate business conducted by foreign investors consist of two levels, central government and local authorities. The central government has provided several guidelines to regulate the land administration. The most notably are the Law of Land Administration of the People's Republic of China (1998), the Interim Rules 1990 on Sale and Transfer of State Land's Use Rights in Cities and Towns (the 1990 Interim Rules), and the Regulations 1990 on Development and Management of Tracts of Land by Foreign Investors (the 1990 Regulations). Local authorities (provinces, cities and/or counties) have also posted some regional regulations and policies that are applied only in particular local jurisdictions. Often local authorities offer some incentives designed to attract foreign investors. The State Council is empowered to be on behalf of the State to administer the land owned by the State. All the land in China needs to be registered and recorded.

Although some efforts have been made, the lack of transparency in administrative procedures and arbitrary application of regulations and laws remain one of the main problems that have discouraged foreign companies to invest in China. Hopefully, this situation will change after China's WTO accession.

The following are areas of law that may affect real estate businesses:
State planning and budget law;
Land administration law (covering land leasing, property transfers, housing condemnation and demolition);
Planning law;
Construction law;
Public bidding law;
Environmental protection law;
Contract law;
Finance law (laws and regulations governing loans, financing and leasing, foreign exchange regulations and insurance);
Tax law;
Laws governing foreign-funded enterprises;
Corporate law;
Laws on foreign investment;
Laws on the protection of consumer rights and interests;
Labor law.

Administrative Agencies Affecting Real Estate Businesses
Currently, there are 31 provinces, municipalities and autonomous regions in China excluding Hong Kong and Macao Special Administrative Regions, and Taiwan. Chongqing Municipality, with a population of 30.4 million, is the most populated city in China. Beijing-the Capital, Shanghai-the commercial center, and Tianjin are the other three municipalities. The State Council is the highest administrative authority in China. It administers all other ministries and departments at central government level, and provinces at local level. All foreign-funded projects with a total investment of U.S. $30 million or less must receive approval from relevant local authorities or municipal working committees in charge of foreign investment. Investment projects valued at U.S. $30 million and above, need to be reported to the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) for approval after being reviewed by the local authorities. An approval from the State Council is required if the investment is on the state-owned land and the assignment involves more than 1,000 mu (67 hectares) of cultivated land or more than 2,000 mu (133 hectares) of other land.

Where there is foreign investment in tract land development, the municipal or county government shall prepare the proposal, a preliminary feasibility report. If the project involves less than 1,000 mu (67 hectares) of cultivated land or less than 2,000 mu (133 hectares) of other land, and its total investment is under U.S. $30 million, the proposal shall be submitted to the government of the related province directly under the Central Government or special economic zone for approval. If the involved investment exceeds the above limit, the proposal shall be submitted by the provincial-level government to the State Development Planning Commission for examination before being submitted to the State Council for final approval.

Registration of assignment, transfer, lease, mortgage and termination of right to use land is processed at local land and housing administrative departments in accordance with land and pertinent regulations of the State Council. The following relevant government agencies and committees are usually involved in real estate development projects:

Land and housing departments;
Planning committees and bureaus;
Construction committees;
Environmental protection departments;
Public bidding departments;
Tax departments;
Industry and commerce departments;
Transportation departments;
Public security and fire departments;
Foreign exchange departments;
Cultural relics departments;
Power supply bureaus;
Water companies.

Taxation System
China's tax laws and policies are made by the National People's Congress and its standing committee, State Council, the Ministry of Finance, State Bureau of Taxation, State Council Customs Duty Regulation Commission, and General Administration of Customs. The main tax law for foreign investors is Foreign Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises, adopted at the Forth Session of the National People's Congress and promulgated by the Order No. 45 of the President of PRC on April 9, 1991. According to Article 5 of the law, the income tax on enterprises with foreign investment and the income tax which shall be paid by foreign enterprises on the income of their establishments or places set up in China to engage in production or business operations shall be computed on taxable income at the rate of 30%. Local income tax shall be computed on taxable income at the rate of 3%.

Generally, China's tax policy toward foreign invested enterprises grants preferential tax to the industries and regions that are encouraged by China to receive investments. The income tax on enterprises with foreign investment and foreign enterprises established in special economic zones is levied at the reduced rate of 15%. In addition, foreign enterprises that have been operating for more than 10 years may be exempt from enterprise income tax in the first and second profit-making years and enjoy a 50% reduction in the following three years.

Other taxes that may affect foreign businesses include land-use tax, land value-added tax, housing tax, contract tax, stamp tax, business tax, tax on urban maintenance construction, tax on the occupation of cultivated land and tax on vehicles and ships. There are certain tax treaties that offer foreign businesses operating in China some breaks. China has signed agreements with 60 countries on avoiding double taxation and tax evasion, and 51 agreements of which have gone into effect by July 1999. The first income tax treaty between China and U.S. known as the Agreement for the Avoidance of Double Taxation and the Prevention of Tax Evasion (Sino-U.S. Agreement) was signed in 1984. The agreement aimed "to reduce double taxation of income earned by residents of either country from sources within the other country. Another goal of the agreement was to prevent avoidance of the income taxes imposed by the taxing authority of either country". Under the treaty, China cannot tax U.S. business income unless the business activities in China are "substantial enough to constitute a permanent establishment or fixed base".

Foreign investors may also be exempt from personal income tax on the after-tax profits (dividends, bonuses) they obtain from the foreign-funded enterprise. Production and management equipment, building materials and vehicles used for production and other goods imported as part of the total investment may be exempt from import duties, value-added tax and consumption tax. Moreover, in order to competing with other provinces/regions, local governments often have their own incentives for foreign investors. The following shows the existing taxes implemented in China.

The Existing Taxation System in China
1. Turnover tax: This consists of value-added tax, consumption tax and business tax, three kinds in all. These taxes are collected according to the sales income or business income obtained by the taxpayers in the process of production, circulation or service.

2. Income tax: This includes enterprise income tax (applicable to domestic enterprises such as State-owned enterprises, collective enterprises, private enterprises, joint enterprises, and shareholding enterprises), foreign-invested enterprises and foreign enterprises income tax, and individual income tax, three kinds in all. These taxes are collected according to the profits or income obtained by producers, managers or individuals.

3. Resources tax: This consists of resources tax and city and town land use tax, two kinds in all. These tax are collected from those who engage in resources development or use city and township land, and this will realize the compensated use of the State resources and regulate the resources differentiate income of the taxpayers.

4. Special purpose tax: This includes city maintenance and construction tax, tilling land possession tax, fixed asset investment orientation regulated tax and land value-added tax, in four kinds. These taxes are set for special purposes and to regulate special objects.

5. Financial tax: This includes housing property tax, city real estate tax and inheritance tax (not yet collected), three in all.

6. Act tax: This includes car and boat use tax, care and boat license tax, stamp tax, contract tax, securities trade (not yet collected), slaughter tax and banquet tax, in seven kinds. These taxes are collected on special acts.

7. Agricultural tax: This includes agricultural tax and husbandry tax, in two kinds. These taxes are collected from enterprises, units and individuals that have obtained agricultural income and husbandry income.

8. Customs duty: This is collected on merchandise and products that enter into or go out of China.

Please note that the above taxes are not necessarily to be collected from each enterprise, unit or individual. Generally speaking, profit-making enterprises should pay enterprise income tax. Enterprises producing consumption goods that should be taxed should pay consumption tax. Businesses engaged in fixed asset investment should pay fixed asset investment orientation regulated tax. In addition, enterprises should pay stamp tax for their production, business account and contracts signed with others, and enterprises owing houses and cars should pay housing tax and car use tax.

Apart from tax, the State stipulated that there are three non-financial administrative income items that should be collected by the tax authority, which include additional education fee, mine use fee and cultural undertaking construction fee. According to the stipulations of the State Council, provincial governments may require the collection of social insurance fee by tax departments. Check with a local attorney or accountant to make sure how taxation system works in China.

Real estate related taxes in China include Sales Tax, Land Appreciation Tax, Cultivated Land Usage Tax, Transfer Tax, Property Tax, City and Town Land Usage Tax, Urban Construction Tax, Stamp Tax, and Income Tax. In addition, the local government or service providers levy various fees on real estate transactions. For instance, there are about three categories of real estate fees in Shanghai. They are: 1) Transaction handling and registration fees 2) Public notary and land measurement fees 3) Others consisting of appraisal, broker, auction, and exchange fees. The following table shows major residential real property transaction related taxes.

* Include Sales Tax, Urban Construction Tax, Education Tax, Property Tax, and Income Tax.
* There may also have some fees associated with the transaction.
Source: Zhang, Yongyue, Fang, Chen, Practical Real Estate Handbook, Shanghai Oriental Press, 1999.

Mortgage/Home Loans
The housing mortgage system currently in China has just started. Several cities have enacted legislation and regulations to provide guidelines for mortgage processing on real property. For instance, in Guangzhou, the local government published regulations handling mortgages and required domestic mortgage lender to be licensed by a central bank.

The maximum period of home loan repayment is 30 years. Prospective homebuyers are normally required to pay down 20 percent of the purchase price out of their own savings. It's not unusual to see buyers to put down as much as one-third or half of the cost of a new home in cash mainly thanks to the high saving rate (about 45%) and limited financing resources.

The biggest provider of home mortgage loans in China is the China Construction Bank (CCB). The housing loans made by the four state-owned commercial banks were RMB355.6 billion (about U.S. $43 billion) in 1999 according to a report. Of the total loans, RMB217.2 billion (about U.S. $26.3 billion) went to real estate developers and RMB 126 billion (U.S. $15.2 billion) to the mortgage loan sector accounting for about 35% of the country's overall real estate loan amount at the end of 1999.17 From January to November of 2000, the home mortgage loan amount was RMB 296 billion (about U.S. $36 billion). Since the market is so new that most homebuyers do not have significant collateral to back up a loan. Most banks require borrowers to have a guarantor. Foreign lenders are not allowed into home loan area at this time. But this will change after China's accession to the WTO.

In addition to bank loans, city workers may also borrow money from the housing provident funds (Zufang Gongjijing) if their companies or work units are participants of the funds. The fund allows employees to contribute four to eight percent of their salaries into the fund. The employers then pay a matching five percent of payroll. The interest rate in the provident funds is usually lower than those offered by banks. By September of 2000, 67.77 million employees nationwide have joined housing provident funds.

Foreign Business Establishment
There are several types of investment/business form for foreign investors or operations to conduct business in China including Sino-foreign joint ventures, Sino-foreign cooperative ventures, wholly foreign-owned ventures and cooperative exploitation. Each of them has its unique advantages and disadvantages depending on finance resources, market goals, tax purpose, and other factors.

Based on current laws and regulations, the establishment of foreign invested enterprises will go through the item-by-item examination, approval, and registering system. These procedures are implemented by various government agencies. Basically, there are four steps to establish joint ventures and cooperative enterprises. They are listed below:

1. To submit the project proposal concerning the establishment of the enterprises. Upon the approval by relevant departments (Planning departments or managing departments of technological reform), all the involved parties can start to work on researches of the project feasibility;

2. To submit the research reports on projects feasibility. Upon the approval, all involved parties in the investment can negotiate and work toward signing legal documents, e.g., contracts and regulations of the enterprises;

3. To submit the contracts and regulations of the enterprise to be established. Upon the approval of the departments in the Ministry of Foreign Trade and Economic Cooperation, the examination and approval institutions will issue the approval Certificate for establishing foreign invested enterprises;

4. With the approval certificate, the investors go to the administrative institutions of industry and commerce to complete the procedure of registration for the enterprise.

5. The procedures for establishing foreign invested enterprise are comparatively simple. The application along with the regulations of the enterprises and other relevant documents can be filed after the tentative project application reports are approved in written form by the governmental examination and approval authorities. Upon approval, the foreign enterprises can go through registration procedures with the approval certificate.

The following are major market entry strategies for foreign businesses:

Establishing a Representative Office. Representative offices are probably the easiest type of offices for foreign firms to set up in China. But these offices are limited by Chinese law to performing "liaison" activities, which means they cannot sign sales contracts or directly charge customers or supply parts and after-sales services for a fee. Most representative offices perform these activities in the name of their parent companies. Despite limitations on its scope of business activities, this form of business has proved very successful for many U.S. companies as it allows the business to remain foreign-controlled.

Foreign concerns may also choose to open branch offices under China's Company Law. While representative offices are issued a registration certificate, branch offices obtain an actual operating or business license and can engage in profit-making activities. A representative office gives a company increased control over dedicated sales force and permits greater usage of its specialized technical expertise. The cost of supporting a representative office or branch office varies depending on location, size and how it is staffed. The largest expenses are rent for office space and housing, expatriate salaries and benefits.

Foreign companies that wish to apply for an establishment of representative offices in China should file applications with competent commissions, ministries and administrations of the Government of the People's Republic of China for approval, in accordance with the nature of their business. Generally, the following documents are required when applying for opening an establishment of a representative office in China:

1. A completed and signed application from the president or managing director of the enterprise, including the name of the representative office to be established, information on senior officials, its scope of business, the duration of stay, its address, etc;

2. An official license to do business issued by competent authorities of the foreign country or region where the enterprise is based;

3. Certificates of the credibility rating of the enterprise issued by financial institutions, which have regular business relations with the enterprise;

4. And, letters of authorization for the personnel with the representative office appointed by the enterprise and the resume of the personnel.

Additional documents, such as annual statement of assets and liabilities, the charter of incorporation and a list of the members of the board of directors, may be also required, particularly for banking and insurance concerns that are approved on a selected basis.

Once approved, the concerned firm will need to contact the State Administration for Industry and Commerce of the People's Republic of China to complete the procedures of registration within 30 days starting from the date of approval. A registration fee is required for the assurance of the registration certificate.

Establishing a Chinese Subsidiary. A locally incorporated equity or cooperative joint venture with one or more Chinese partners, or a wholly foreign-owned enterprise, may be another option in developing markets for a company's products or services. Obviously, the role of the local partner in the success or failure of a joint venture is very crucial. A good partner will have the connections to help smooth over red tape and obstructive bureaucrats. A bad partner, on the other hand, may make even the most promising venture fail. The drawback for this business form includes concerns on conflicts of interest (e.g., the partner setting up competing businesses), bureaucracy and violations of confidentiality. Also, joint ventures sometimes consume lots of time and commend costly resources. Foreign companies should pay careful attention to critical areas such finance, personnel and operations to ensure success.

Franchising. China currently has no laws to specifically address franchising, but many foreign businesses are beginning to establish multiple retail outlets under a variety of creative arrangements, including some that for all practical purposes function like franchises. It was reported that nearly all of the foreign companies operating multiple-outlet retail venues in China either manage the retail operations themselves with Chinese partners (typically establishing a different partner in each major region or city) or sell to a master franchisee that then leases out and oversees several franchise territories within the territory. According to the WTO agreement, within three years of its WTO accession, China is required to eliminate restriction on equity share, number of outlets and geographical area.

Direct Selling. Direct selling was widely spread after it was introduced by foreign companies. However, in early 1998, the government started implementing a series of strict controls over this industry and requiring the re-licensing of all direct selling companies to protect consumers' interest due to some irregularities from some foreign and domestic companies. Although a few major direct selling companies were re-issued the business license, restrictions and requirements have resulted in difficult business environment. The foreign direct selling industry is working with various government departments and agencies, as part of an overall effort toward China's WTO accession, to construct a fairer business climate in this industry.

Local agents. In recent years, local sales agents have been growing rapidly. The agents handle internal distribution and marketing. Most of these companies do not have import/export authorization. They are the next layer down the distribution chain, buying imported products from those that do. They may be representative offices of Hong Kong or other foreign trading companies, or domestic Chinese firms with regional or partial national networks. It may make sense to engage several agents to cover different areas, and to be cautious when giving exclusive territories. Usually, there are at least five major regions: the South (Guangzhou), the East (Shanghai), the Central/North (Beijing-Tianjin), West China, and the Northeast.

Conclusion
The late Chinese leader Deng Xiaoping liked to say: 'touching the stones while crossing the river' if you have no idea of how deep the water is. China, like other emerging economies is a challenging place for foreign companies due to some uncertainties and barriers. Without necessary knowledge and preparations before entering into China, prospective foreign companies may run risk of failure. On the other hand, China is also a huge market filled with promises and potentials with its one-fifth of the world's population and fast-growing economy. China's expected WTO entry by late this year or early next year will surely inspire more hope and generate many opportunities that are needed in this globally downward economy.

Resources
China Ministry of Construction
No. 9 Shanlihe Road
Beijing, China 100835
Tel: 86-10-68394215/86-10-68393575

Ministry of Foreign Trade and Economic Cooperation
2 Dongchang'an Jie
Beijing, China 100731
Tel: 86-10-6519-8804
Fax: 86-10-6519-8904

U.S. Embassy in Beijing
3 Xiu Shui Bei Jie
Beijing, China 100600
Tel: (86-10) 6532-3431
Fax: (86-10) 6532-3279

Ministry of Land and Resources
64 Fuchengmennei Avenue, Xicheng District
Beijing, China 100035
Tel: (86-10) 66558030
Fax: (86-10) 66558004

State Development Planning Commission
38 Yuetannanjie, Xicheng District, Beijing 100824, China
Tel: (86-10) 6850-2968/ 6850-2407
Fax: (86-10) 6850-2728

State Economic and Trade Commission
26 Xuanwumen Xidajie, Beijing 100053, China
Tel: (86-10) 6319-3570
Fax: (86-10) 6319-3625

State Economic Restructuring Office
22 Xi'anmen Dajie, Beijing 100017, China
Tel: (86-10) 6309-6437/6309-7749
Fax: (86-10) 6601-4562

China Council for the Promotion of International Trade
& China Chamber of International Commerce
1 Fuxingmenwai Street
Beijing 100860
Tel: (86-10) 6851-3344
Fax: (86-10) 6851-1370

Construction Industry Manufacturers Association (CIMA)
No. 6 Southern Capital Gymnasium Road, Room 458, Office Tower
New Century Hotel
Beijing 100044
Tel: (86-10) 6849-2403
Fax: (86-10) 6849-2404

U.S.-China Business Council
Pat Powers, Chief Representative
CITIC Building, Room 902
Beijing 100004
Tel: (86-10) 6500-2255 ext.3920
Fax: (86-10) 6512-5854, 6592-0727

Office of U.S. Trade Representative, China Desk
600 17th Street, NW
Washington, DC 20506
Tel: (202) 395-5050
Fax: (202) 395-3911