A model country?

While the Chinese government's property policies are cause for concern, they should not—and are not—scare away investors. By Aaron Lovell

The Shanghai Urban Planning Museum sits near the People's Park in the center of the city, right across the street from the world-famous Shanghai Museum, which collects artifacts and art from 3,000 years of Chinese history.

Depending on who you believe, the planning museum is a propaganda display or an educational tool. Built in the late 1990s, as the Western tourists and businessmen were still trickling in, the museum served to acquaint the people of Shanghai with the massive changes that were going on around them— and what was planned for their city's future.

The main draw takes up the better part of the museum's third floor: a massive, 4,000 square foot model of what Shanghai is going to look like in 2020. The size and scope of the model is breathtaking—it's the sort of thing that would make legendary New York City planner Robert Moses blush.

Visitors are confined to the edges of the model and have to squint to see anything even remotely familiar—People's Square, East Nanjing Road, the Bund—which sit miles and miles (or, really, feet and feet) beyond all types of housing blocks, ring roads and skyscrapers, with the occasional football field and park thrown in for good measure. Still, the distinct outlines of the Jin Mao Tower and Oriental Pearl TV Tower can be seen far off in the center of the room. (It must be said that the skyline of the museum model is much less hazy than the real thing.)

For any real estate investor (or reporter), the master plan laid out in the museum is sobering. When looking at the sheer scope of the plans for Shanghai (and Beijing and Tianjian and…), the oft-discussed macroeconomic proposals from the central government start to make a bit more sense.

Speaking to a real estate conference in Chongqing, Zhai Baohui, a division chief and professor in the country's Ministry of Construction, tried to justify to a room full of investors and developers why the macroeconomic controls were necessary. He pointed to the need to correct the imbalance of housing coming on line in a city like Beijing, where apartment prices were getting too expensive for the population.

“The market needs further regulation,” he said. “In general, foreign investment would be welcome, but for some specific sectors there will be restrictions.”

For all the hand-wringing and consternation about various policies—some of which, it might be argued, were brought on by Western firms themselves—it probably only makes sense for the government to try and correct the supply and demand mismatch.

Another concern about the country is the changing legal environment, which can transform with little notice. While not ideal, many people I spoke with in China said that the government circulars issued by Beijing oftentimes seek to correct vagueness in the existing tax or repatriation policies.

Sure, changes in the law can be unpredictable. And yes, it's hard to plan around a shifting legal landscape. But, much like the larger economic policies, the aims of Beijing are not to stymie foreign investment or scare off investors.

For instance, a recent decree from Beijing about the Land Value Appreciation Tax seemed to be on everyone's mind. But, as it was explained to me, the circular set out to clarify the tax code, which could have been interpreted a few different ways; the policy revision was largely a case of making sure the developers and investors were on the same page. Most foreign firms had already been underwriting the full tax formula.

A greater concern to foreign investors is probably the selective enforcement of certain laws from province to province or city to city. This was another topic that dominated the conference in Chongqing: how the laws could be interpreted differently outside of the more established, auction-dominated first-tier markets. It's an area that needs improvement, most agreed, and something that could improve as more foreign capital looks to the secondary markets for investment.

But for all the talk of government circulars and macroeconomic policies, staring at the model of Shanghai in the planning museum, there seemed to be little dearth in opportunity. And, as everyone knows, there's no shortage of firms looking for a piece of the action.

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