Against a backdrop of rising house prices all over China, foreign investment in the Chinese real estate market keeps increasing. According to Shen Danyang, spokesman for the Ministry of Commerce, although foreign investment in real estate is increasing, it makes up a comparatively low proportion in China's overall investment in real estate development. However, the Ministry of Commerce will take targeted measures to prevent speculative investment, strengthen surveillance on the cross-border financing activities, regulate investment in real estate, and direct foreign investment towards residential property for the elderly and projects directed towards tourism, education, and other emerging businesses.

Since last year, against a backdrop of rising house prices, foreign investment and overseas hot money has been flowing steadily into the Chinese real estate market. Commercial properties in the first tier cities are a preferred target. Last year the biggest real estate private equity firm in the world, the Blackstone Group, announced its acquisition of 40% of the stock in the Chinese shopping mall group SCP Co Ltd, whose total assets are valued at over 2 billion USD. And at the end of last year, Capitamalls also announced that it is planning to invest 2.2 billion USD in purchasing the 2nd phase of the Baiyun Greenland Center in Guangzhou.

Although regulatory policies are being continually tightened, the house price rise goes on. According to some experts, the involvement of foreign capital has encouraged real estate speculation in some investment-hot cities and contributed to rising house prices. If a large amount of foreign capital is allowed to flood into the real estate market in a short period and then withdraws quickly, the market may be in danger of collapse.

Li Youhuan, director of the Comprehensive Development Research Center of Guangdong Academy of Social Sciences, expressed the view that in most cases hot money will enter the Chinese market under the guise of a lawful purpose. If it then succeeds in penetrating the real estate market, uncertainty in China's real estate industry will increase. As the real estate market bubble inflates, the lives of ordinary Chinese people will be seriously impacted by high house prices.

The Federal Reserve has announced that the US will gradually exit from QE policy, and hot money is looking for alternatives to the emerging markets, which has increased the risk faced by China's real estate market. On the subject of the foreign capital flowing into China's real estate market, Shen Danyang added that the Ministry of Commerce has required the local commercial supervision authorities to keep a close eye on commercial real estate projects attracting investment from or being purchased by foreign capital, analyze any development trends and the influence of foreign investment on logistics and industrial real estate, and take action to keep foreign investment out of the domestic real estate market.

Since China maintains its capital account under surveillance, foreign capital can only withdraw through trade or investment channels, not capital channels, which to some extent has buffered the influence of the Fed's QE on China's capital market. China is unlikely to suffer the kind of shock experienced by India or Indonesia, but we should still maintain precautions against the risk of hot money flowing into the real estate market.