Habitat International 43 (2014) 231e239

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Habitat International
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Foreign direct investment in China’s real estate market

Eddie C.M. Hui*, Ka Kwan Kevin Chan
Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong

a r t i c l e i n f o a b s t r a c t

Article history: This paper analyzes the recent trend of foreign direct investment in China’s real estate market (FDIRE). It
Available online 8 May 2014 develops a panel regression model to examine the determinants of FDIRE in China. It incorporates a new
explanatory variable to test the difference between FDIRE in coastal areas of China and in other areas.
Keywords: Such variable was never incorporated in models of previous studies. The result reveals that GDP per
China capita and the number of foreign real estate enterprises are the most significant factors affecting foreign
Real estate
investment in China’s real estate market. This reflects that China’s economic growth and its increasingly
FDI
open market have a significant contribution to the rising trend in foreign investment in its real estate
FDIRE
Panel regression
market. The newly incorporated regional factor COASTAL in the panel regression model shows that FDIRE
in China still concentrates in coastal areas. However, there is more investment in those fast growing areas
in recent years. It is suspected that FDIRE may overheat China’s real estate market. Thus the Chinese
government should monitor the real estate market carefully to stabilize the house price.
Ó 2014 Elsevier Ltd. All rights reserved.

Introduction
China’s economy has been growing at a fast rate in recent years.
Foreign investment has taken an important role in China’s recent
economic success. Since the establishment of the People’s Republic
of China (PRC) in 1949, China had basically remained a closed
economy until 1978 when Deng Xiao-ping implemented the open-
door policy. Then China began to transform from a planned econ-
omy to a market economy, and foreign capital (mainly in the form
of foreign direct investment (FDI)) started to flow into the country,
driving China to the road to globalization.
In July 1979, The Law of the People’s Republic of China on Joint-
Ventures using Chinese and Foreign Investment was adopted,
granting foreign investment a legal status in China (Fung, Iizaka, &
Tong, 2002). In the next year, four Special Economic Zones (SEZs):
Shenzhen, Zhuhai, Shantou, and Xiamen, were set up. Foreign
partners in those SEZs could enjoy preferential treatment, although
stringent approvals to set up joint ventures and currency controls
were required (Wong & Choy, 2008). These policies marked China’s
first step to globalization. In 1984, the state Council further desig-
nated 14 Open Coastal Cities, wherein foreign investors could enjoy
* Corresponding author. ZN744, Dept. of Building and Real Estate, The Hong Kong
Polytechnic University, Hong Kong. Tel.: þ852 27665881; fax: þ852 27645131.
E-mail addresses: bscmhui@polyu.edu.hk (E.C.M. Hui), ckkwyc@yahoo.com.hk
(K.K.K. Chan).
tax incentives, though less preferential than the SEZs (Wong &
Choy, 2008). Twelve of the fourteen cities were designated Tech-
nology Promotion Zones in 1985 to expedite the transfer of tech-
nology (Fung et al., 2002). In the same year, the “development
triangles” e the Yangtze River Delta, the Pearl River Delta, the Min
Nan region, Liaodong and Shandong Peninsulas, and the Bohai Sea
Coastal Region, were opened to foreign investors, too (Fung et al.,
2002). This further fuelled the boom in foreign investment.
In 1986, two important provisions related to FDI were enacted e
the Law of the People’s Republic of China on Enterprises Operated
Exclusively with Foreign Capital adopted on April 12, and the Pro-
visions of the State Council of the People’s Republic of China for the
Encouragement of Foreign Investment (which is also called “22
Article Provisions”) adopted on October 11. The former authorized
the establishment of wholly foreign-owned enterprises (WFOE),
which became the preferred form of FDI in China, while the later
provided foreign joint ventures with preferential tax treatment, the
freedom to import inputs, the right to retain and swap foreign
exchange with each other, and simpler licensing procedures, etc
(Fung et al., 2002). These two laws provided stronger incentive for
FDI in China. As a result, the growth rate of FDI started to accelerate
in the early 1990s.
On November 10, 2001, China’s entry into the WTO was officially
approved after 15 years of negotiations. China became a formal
member of WTO one month later. As a WTO member, China had to
further open its domestic market, particularly in the services sector.
This included eliminating geographic and other restrictions in key

http://dx.doi.org/10.1016/j.habitatint.2014.04.007
0197-3975/Ó 2014 Elsevier Ltd. All rights reserved.
232 E.C.M. Hui, K.K.K. Chan / Habitat International 43 (2014) 231e239
sectors and increasing foreign ownership limits in telecommuni-
cations, life insurance, securities, distribution and retailing (Tseng &
Zebregs, 2002). China was also required to loosen its trade re-
strictions, e.g., to reduce its industrial tariffs to an average rate of
9.4% by 2005 (Fung et al., 2002). These policies of opening the
market attracted FDI, especially in industries with huge market
potentials. Hence FDI in China continued to grow rapidly over the
past ten years. In 2010, the amount even topped the US$100 billion
threshold for the first time.
Out of the different sectors in FDI, FDI in real estate (FDIRE) is
one of the fast-growing sectors in recent years. In the past, the state
controlled the land development and the protection of private real
estate rights was inadequate, so foreign investors played a small
active role in the Chinese property market (Fu, 2009). However,
since the land reform in the late 1980s which separated trans-
ferrable land use rights from state ownership (Wong & Choy, 2008),
foreign investment in China’s real estate market has kept on
growing at a rapid rate. The real estate industry is the second
largest sector in China to attract FDI (Wong & Choy, 2008). Hong
Kong plays an important role in foreign investment in China’s real
estate market, as Hong Kong is the largest contributor of FDIRE in
China (Wong & Choy, 2008).
In this paper, we investigate the factors affecting FDI in
China’s real estate market in recent years. We analyze the trend
of entry modes and regions of investment from foreign real es-
tate enterprises. Furthermore, we set up a panel regression
model to investigate the determinants of FDIRE in China. We
incorporate a new explanatory variable to test the difference
between FDIRE in coastal areas of China and in other areas. Such
variable indicating geographical location was never incorporated
in models of previous studies (see Section 2). This reveals the
uniqueness of our model. Throughout the paper, “China” refers to
mainland China only, which excludes Hong Kong, Macau and
Taiwan.
The paper proceeds as follows: Section 2 reviews previous
works on FDI/FDIRE in China. Section 3 gives some brief statistics of
China’s FDI/FDIRE. We analyze China’s FDIRE by different types of
entry modes and geographical regions. In Section 4, we set up a
model to investigate the determinants of FDIRE in China. Section 5
discusses the implications of China’s FDIRE based on the results. We
draw up conclusions in Section 6.
Literature review
Most of the previous literature focused on the effect of FDI on
China’s economy. In the early 1990s, Kamath (1990) already studied
FDI in China. He identified that the major objectives of FDI policies
in China were stimulating economic growth, diversification of the
country’s industrial base, technology transfer, and to upgrade
managerial and labor skills. Another typical paper was written by
Fung et al. (2002), who found that FDI had not only been an
important element of China’s economic growth, but had also pro-
moted China’s economic transformation, and had played an
important role in helping China move up the technology ladder and
to industrial restructuring. Tseng and Zebregs (2002) also found
that FDI had a significant contribution to China’s GDP growth, and
had created employment opportunities and built a highly
competitive and dynamic manufacturing sector for exports, too.
However, they also found two side effects of FDI: an increasingly
complex and biased tax system, and a growing income disparity
between the coastal and inland provinces.
There are also a number of studies using mathematical
methods to analyze the effect of FDI. One approach is to deal with
the determinants of FDI, mainly by the method of panel regres-
sion. Dees (1998) found that the traditional determinants of FDI
were relevant for China: domestic market size, cost advantages
and openness to the rest of the world. His result supported the
view that FDI had a positive effect on China’s growth. Coughlin
and Segev (2000) determined that the major factors of China’s
FDI were economic size (þve), average productivity (þve), coastal
location (þve), average wage (ve) and illiteracy rate (ve). Cheng
and Kwan (2000) identified that the major determining factors of
FDI in China were the size of the regional market (þve), infra-
structure investment (þve), preferential policy (þve) and wage
cost (ve). In addition to this list, Havrylchyk and Poncet (2007)
added agglomeration effect (þve) and labor productivity (þve)
as significant factors to FDI. However, Sun, Tong, and Yu (2002)
found that cumulative FDI relative to cumulative domestic in-
vestment has a negative impact on the new FDI, suggesting that
foreign investors might prefer a less competitive environment.
Besides the factors mentioned, Ren and Pentecost (2007) showed
that trade, exchange rate and tax also have a significant effect on
the national and regional level FDI stock. Another approach is to
test the spillover effect, which was used by Madariaga and Poncet
(2007), who showed that for an increase of one standard deviation
in FDI in surrounding regions, there would be a 5% increase of FDI
in the locality. However, Hu and Jeffeson (2002) discovered the
opposite effect in the electronic industry. Meanwhile, Javorcik
(2004) argued that the effect appeared to take place via back-
ward linkages.
Some studies focused on FDIRE in China. Through examining the
experience of Hong Kong based real estate developers in investing
in China, Wong and Choy (2008) discussed the role of Hong Kong
developers in transforming China through FDI. They also examined
the major difficulties confronted by these developers in the past
two decades and explained how they overcame them through
different forms of institutional arrangement. Fu (2009) studied FDI
in the real estate market in China, focusing on cross-cultural busi-
ness. He found that cultural differences made up an important and
real obstacle preventing entries of investors into China’s real estate
market. According to his paper, unlike the Western style, Chinese
parties strived for trust and long-term relationships with their
partners. Jiang, Chen, and Isaac (1998) discussed the effect of
foreign investment on China’s real estate industry. They argued that
FDI in China’s real estate market was very different from “typical”
FDI except in form, and in fact shared most of the characteristics of
portfolio investment. They also mentioned that FDI in real estate
reflected the imperfections of China’s capital markets. He, Wang,
and Cheng (2009) modeled FDIRE inflow to Chinese provinces
during the period 2000e2007 as a function of provincial charac-
teristics, which reflected local market conditions, regional gover-
nance, land commercialization and housing reforms. Their findings
implied that foreign investors in China’s real estate industry stress
returns to capital while appreciate the conducive institutions when
choosing locations. He and Zhu (2010) used a panel data of 35 major
Chinese cities during the period 2002e2008 (year 2004 is excluded
due to missing data) to investigate the general association between
FDIRE, local market opportunities, and liberalized economies/more
developed land markets. Their results showed that FDIRE is com-
mon in large cities with larger number of populations, foreign in-
vestments and tourists.
Although there is a broad range of literature on China’s FDI, only
a limited number of them focused on FDIRE. For the articles using a
panel model to investigate determinants of China’s FDIRE, the latest
time of data they covered is year 2008 (He & Zhu, 2010), so they did
not cover the most recent information. Moreover, they did not
include geographical location as a factor, probably due to difficulty
in quantifying this factor. In order to bridge this gap, we extend our
timeline to 2010 and include a factor indicating whether a province
is coastal or not in our model.
 E.C.M. Hui, K.K.K. Chan / Habitat International 43 (2014) 231e239 233

Table 1
FDI inflow to China from top 7 countries (as in 2010) in 2000e2010, unit: US$1 million.

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Hong Kong 15,500 16,717 17,861 17,700 18,998 17,949 20,233 27,703 41,036 53,993 67,474
38.07% 35.66% 33.86% 33.08% 31.33% 29.75% 32.11% 37.05% 44.41% 59.97% 63.81%
Taiwan 2297 2980 3971 3377 3117 2152 2136 1774 1899 6563 6701
5.64% 6.36% 7.53% 6.31% 5.14% 3.57% 3.39% 2.37% 2.06% 7.29% 6.34%
Singapore 2172 2144 2337 2058 2008 2204 2260 3185 4435 3886 5657
5.33% 4.57% 4.43% 3.85% 3.31% 3.65% 3.59% 4.26% 4.80% 4.32% 5.35%
Japan 2916 4348 4190 5054 5452 6530 4598 3589 3652 4117 4242
7.16% 9.28% 7.94% 9.45% 8.99% 10.82% 7.30% 4.80% 3.95% 4.57% 4.01%
USA 4384 4433 5424 4199 3941 3061 2865 2616 2944 3576 4052
10.77% 9.46% 10.28% 7.85% 6.50% 5.07% 4.55% 3.50% 3.19% 3.97% 3.83%
South Korea 1490 2152 2721 4489 6248 5168 3895 3678 3135 2703 2693
3.66% 4.59% 5.16% 8.39% 10.31% 8.57% 6.18% 4.92% 3.39% 3.00% 2.55%
UK 1164 1052 896 742 793 965 726 831 914 1469 1642
2.86% 2.24% 1.70% 1.39% 1.31% 1.60% 1.15% 1.11% 0.99% 1.63% 1.55%
Others 10,792 13,052 15,343 15,886 20,073 22,296 26,308 31,392 34,380 13,726 13,274
26.51% 27.84% 29.09% 29.69% 33.11% 36.96% 41.74% 41.99% 37.21% 15.25% 12.55%
Total 40,715 46,878 52,743 53,505 60,630 60,325 63,021 74,768 92,395 90,033 105,735

Reference: Ministry of Commerce of People’s Republic of China (2014), Invest in China (2014), Wong and Choy (2008).

Overview of China’s FDI statistics
FDI as a whole
This section shows some brief statistics of China’s FDI inflow in
the last decade.
Table 1 shows the total amount of FDI inflow to China from the
top 7 countries (as in year 2010) during the period 2000e2010.
China’s total amount of FDI inflow rose from US$40.715 billion in
2000 to US$105.715 billion in 2010 e an about 1.5 times increase in
ten years. During the first six years of the last decade, the total
amount of China’s FDI inflow grew steadily. However, since 2006,
the amount of FDI began to rise sharply. The largest increase
occurred in 2008, when the total FDI rose from US$74.758 billion in
the previous year to US$92.395 billion in that year e a 24% increase.
Although China’s FDI fell slightly to US$90.033 billion in 2009 due
to the effect of the global financial tsunami, the figure rose back to
US$105.715 billion in 2010 e the first time that FDI inflow to China
has ever surpassed the US$100 billion threshold. Five of the top 7
contributors of China’s FDI in 2010 are East Asian countries. One of
them is the largest economy in Asia (except China), Japan, while the
other four countries are the “Asian tigers” e Hong Kong, Taiwan,
Singapore and South Korea. Hong Kong remained the greatest FDI
contributor to China over the past ten years. In particular, Hong
Kong’s contribution to China’s FDI increased significantly since
2006. The contribution of Hong Kong to China’s FDI rose from
US$20.233 billion or 32.1% of China’s total FDI in 2006, to US$67.474
billion, or 63.81% of China’s total FDI in 2010. This is because since
July 1, 1997, Hong Kong has become a Special Administrative Region
(SAR) of China, so Hong Kong’s economic ties with China have
become closer and closer since then, so more and more business-
men in Hong Kong invest in Mainland China. Furthermore, the
Closer Economic Partnership Arrangement (CEPA) between Main-
land China and Hong Kong was signed on June 29, 2003. The CEPA
included the implementation of a zero tariff arrangement by
January 2006. This contributed to the significant increase in FDI
inflow from Hong Kong to China from 2006 to 2010. The sharp rise
in Hong Kong’s contribution is the main reason for the significant
increase in China’s FDI from 2006 to 2010.
The real estate sector
In this section, we examine the completed value of real estate
investment projects carried out by Hong Kong, Macau, Taiwan and
other foreign enterprises during the period 2005e2010. We classify
the amount of investment in two ways: by entry mode and by
geographical region. From the data, we analyze the trend of foreign
investment in China’s real estate market in recent years.
Overall trend
Table 2 shows the realized amount of direct real estate invest-
ment from domestic and foreign enterprises from 2005 to 2010.
Note that Hong Kong enterprises contributed most of the invest-
ment of the group “Hong Kong, Macau and Taiwan enterprises”. The
total amount of investment by all real estate enterprises tripled
during this period. The amount of investment from both domestic
and foreign enterprises also increased during this period. Although
there was more and more investment from foreign enterprises,
their share of proportion in China’s real estate market decreased
slightly during the period. Note that from 2008 to 2009, the amount
of investment from Hong Kong, Macau and Taiwan enterprises
increased only slightly. Other foreign enterprises even reduced
their investment in China’s real estate market during this period. A
reason for this is that the global financial tsunami broke out in late

Table 2
Realized amount of direct real estate investment from domestic and foreign enterprises, unit: million yuan.

Year 2005 2006 2007 2008 2009 2010

Domestic enterprises 1,396,341.50 1,689,066.64 2,175,754.94 2,711,120.85 3,220,160.27 4,320,141.39

87.77% 86.96% 86.04% 86.89% 88.85% 89.52%
Hong Kong, Macau and 120,602.10 151,042.00 199,799.57 234,382.79 241,565.39 307,303.26
Taiwan enterprises 7.58% 7.78% 7.90% 7.51% 6.67% 6.37%
Other foreign enterprises 73,981.11 102,183.10 153,329.22 174,815.78 162,455.14 198,495.65
4.65% 5.26% 6.06% 5.60% 4.48% 4.11%
Total 1,590,924.71 1,942,291.74 2,528,883.73 3,120,319.42 3,624,180.80 4,825,940.30

Reference: China Real Estate Statistical Yearbook.

234 E.C.M. Hui, K.K.K. Chan / Habitat International 43 (2014) 231e239

2008, causing a global recession in the first half of 2009. Due to
weaker economic conditions, some foreign investors retreated
from China’s market.
By entry mode
According to Fu (2009), foreign enterprises, including those real
estate developers, can enter China’s market through the following
modes:
1. Wholly foreign-owned enterprise (WFOE)
This is a relatively new entry mode, but its popularity has risen
since the 1990s. As mentioned in Section 1, the Law of the People’s
Republic of China on Enterprises Operated Exclusively with Foreign
Capital was implemented in 1986. This created a more clear busi-
ness environment, so more foreigners enter China in the mode of
WFOEs, especially those real estate companies. In WFOEs, the
foreign company has full control and ownership over the domestic
company without involvement of domestic partners. In 2000,
WFOE accounted for about 51% of total FDI (Alon, 2003; Fu, 2009).
2. Equity joint venture (EJV)
This was one of the most common types of entry modes.
Approximately 60% of all foreign enterprises were EJVs by the end
of 2000. The profits and losses are shared between the parties ac-
cording to their individual contribution of registered capital (Alon,
2003; Deloitte, 2008; Fu, 2009).
3. Cooperative joint venture (CJV)
Statistical Yearbook has a different classification of types of enter-
prises from Fu (2009): “Joint Venture” refers to EJV, while “Coor-
perative” refers to CJV. Both “Solely Funded” and “Share Holding
Company” belong to WFOE.
From the table, we can see that the share of different types of
enterprises in the total completed investment value by foreign real
estate enterprises from 2005 to 2010 followed a similar trend for
Hong Kong, Macau and Taiwan enterprises and other foreign en-
terprises. For both categories, joint venture enterprises had the
largest share among all types of enterprises in 2005. However, their
share gradually decreased over the next five years. The share of
cooperative enterprises also dropped steadily during the same
period. Meanwhile, the share of solely funded enterprises rose
significantly and became the largest share of all types of enterprises
from 2008 to 2010. The share of share holding companies also
increased sharply from 2005 to 2010, though they still shared the
smallest portion of all completed investment over this period. The
figures reveal that WFOE has become a more common entry mode
for foreign real estate enterprises. This is mainly because in WFOEs,
the foreign enterprise receives full control and ownership of the
firm without involvement of domestic partners, so there are fewer
restrictions. Therefore, more foreign enterprises prefer to enter
China in the form of WFOEs. In fact, the Law of the People’s Republic
of China on Enterprises Operated Exclusively with Foreign Capital
adopted on April 12, 1986, which authorized the establishment of
WFOEs, had led to an increase in WFOEs thereafter. This trend
continued in recent years. The trend of increasing number of
WFOEs also reveals that the Chinese government encourages this
form of entry mode which has much less restrictions, i.e. the Chi-
nese government is posing less control on foreign enterprises.

This was the most important entry mode before the early 1990s.
Each party bears its own separate liabilities (Alon, 2003; Fu, 2009).
In CJVs, the parties share investment and profit based on contract
agreements (Deloitte, 2008).
4. Joint development venture (JDV)
This form of entities shares a rather small proportion of all FDI in
China, and is most common in large scale development projects.
Table 3 shows the share of different types of enterprises in the
total realized amount of direct real estate investment from foreign
enterprises from 2005 to 2010. Note that China Real Estate
By geographical region
Table 4 shows the realized amount of direct real estate in-
vestment from foreign enterprises in top 10 provinces or munici-
palities (which are regarded as in the same level as provinces) in
China (as in year 2010) from 2005 to 2010. For both Hong Kong,
Macau and Taiwan enterprises and other foreign enterprises, the
top 10 regions contributed most of the total completed investment
throughout the period. The majority of the top 10 regions are those
core areas (mostly coastal areas). In particular, in 2010, Guangdong
shared the largest portion of all investment from Hong Kong,
Macau and Taiwan enterprises, and the second largest portion of
all investment from other foreign enterprises. One of the main

Table 3
Realized amount of direct real estate investment from types of foreign enterprises, unit: million yuan.

Year 2005 2006 2007 2008 2009 2010

Hong Kong, Macau and Joint venture 58,060.40 66,845.40 87,057.47 87,757.91 92,833.31 125,350.60
Taiwan enterprises 48.14% 44.26% 43.57% 37.44% 38.43% 40.79%
Cooperative 19,425.99 21,243.29 25,266.28 23,887.31 21,604.43 22,668.12
16.11% 14.06% 12.65% 10.19% 8.94% 7.38%
Solely funded 41,598.02 57,988.84 82,198.59 113,961.97 116,783.24 149,509.39
34.49% 38.39% 41.14% 48.62% 48.34% 48.65%
Share holding 1517.69 4964.47 5277.23 8775.60 10,344.41 9775.15
corporation 1.26% 3.29% 2.64% 3.74% 4.28% 3.18%
Total 120,602.10 151,042.00 199,799.57 234,382.79 241,565.39 307,303.26
Other Foreign Enterprises Joint venture 38,566.15 49,095.99 60,149.88 63,343.76 57,586.87 67,781.53
52.13% 48.05% 39.23% 36.23% 35.45% 34.15%
Cooperative 12,665.73 14,092.87 13,979.16 18,068.29 14,310.16 20,209.10
17.12% 13.79% 9.12% 10.34% 8.81% 10.18%
Solely funded 21,398.87 36,986.71 75,744.06 87,813.14 86,552.67 103,786.52
28.92% 36.20% 49.40% 50.23% 53.28% 52.29%
Share holding 1350.36 2007.53 3456.12 5590.59 4005.44 6718.50
corporation 1.83% 1.96% 2.25% 3.20% 2.47% 3.38%
Total 73,981.11 102,183.10 153,329.22 174,815.78 162,455.14 198,495.65

Reference: China Real Estate Statistical Yearbook.

 E.C.M. Hui, K.K.K. Chan / Habitat International 43 (2014) 231e239 235

Table 4
Realized amount of direct real estate investment from foreign enterprises in top 10 regions (as in 2010), unit: million yuan.

Year 2005 2006 2007 2008 2009 2010

Hong Kong, Macau and Guangdong 25,727.78 29,529.74 41,730.02 47,517.41 42,461.21 57,446.53
Taiwan enterprises 21.33% 19.55% 20.89% 20.27% 17.58% 18.69%
Liaoning 8369.79 9741.08 14,917.41 27,690.03 37,485.87 46,251.61
6.94% 6.45% 7.47% 11.81% 15.52% 15.05%
Jiangsu 12,069.48 14,888.57 18,483.27 27,593.87 22,895.37 34,551.00
10.01% 9.86% 9.25% 11.77% 9.48% 11.24%
Fujian 10,611.42 15,102.02 15,297.84 17,352.27 14,459.15 22,775.63
8.80% 10.00% 7.66% 7.40% 5.99% 7.41%
Chongqing 5143.89 4476.75 7184.76 11,603.44 12,851.78 18,251.79
4.27% 2.96% 3.60% 4.95% 5.32% 5.94%
Shanghai 8653.44 10,534.85 12,351.45 14,403.61 15,079.95 18,136.59
7.18% 6.97% 6.18% 6.15% 6.24% 5.90%
Shandong 5113.91 6542.64 9983.27 8262.98 11,881.71 15,286.55
4.24% 4.33% 5.00% 3.53% 4.92% 4.97%
Sichuan 4860.47 6907.65 13,160.40 14,954.01 8086.74 12,425.86
4.03% 4.57% 6.59% 6.38% 3.35% 4.04%
Beijing 11,450.60 13,673.68 18,089.83 12,060.72 11,234.70 11,890.49
9.49% 9.05% 9.05% 5.15% 4.65% 3.87%
Zhejiang 4975.91 6419.24 7751.01 7574.79 10,648.32 11,785.49
4.13% 4.25% 3.88% 3.23% 4.41% 3.84%
Others 23,625.41 33,225.78 40,850.31 45,369.66 54,480.59 58,501.72
19.59% 22.00% 20.45% 19.36% 22.55% 19.04%
Total 120,602.10 151,042.00 199,799.57 234,382.79 241,565.39 307,303.26
Other foreign enterprises Liaoning 7666.03 10,804.74 18,349.24 21,708.12 28,453.20 33,044.89
10.36% 10.57% 11.97% 12.42% 17.51% 16.65%
Guangdong 6563.14 9025.72 21,155.93 27,968.61 21,619.08 26,639.86
8.87% 8.83% 13.80% 16.00% 13.31% 13.42%
Jiangsu 7717.16 11,318.84 20,510.53 24,525.37 16,756.30 19,406.31
10.43% 11.08% 13.38% 14.03% 10.31% 9.78%
Sichuan 2341.29 5563.90 10,775.90 11,053.85 12,259.63 16,822.13
3.16% 5.45% 7.03% 6.32% 7.55% 8.47%
Shanghai 9682.80 10,928.00 12,919.90 15,115.75 10,866.99 15,072.44
13.09% 10.69% 8.43% 8.65% 6.69% 7.59%
Zhejiang 3090.04 4994.85 8486.40 8745.71 9559.89 12,701.38
4.18% 4.89% 5.53% 5.00% 5.88% 6.40%
Chongqing 573.65 1129.12 2207.15 5553.24 5710.03 8258.23
0.78% 1.10% 1.44% 3.18% 3.51% 4.16%
Shandong 2178.16 5037.76 4869.16 6579.04 6848.08 7420.06
2.94% 4.93% 3.18% 3.76% 4.22% 3.74%
Anhui 1803.20 2393.21 4013.66 4705.68 5219.37 7145.76
2.44% 2.34% 2.62% 2.69% 3.21% 3.60%
Fujian 5147.13 7145.11 6206.97 6087.08 5837.21 7014.94
6.96% 6.99% 4.05% 3.48% 3.59% 3.53%
Others 27,218.51 33,841.85 43,834.38 42,773.33 39,325.36 44,969.65
36.79% 33.12% 28.59% 24.47% 24.21% 22.66%
Total 73,981.11 102,183.10 153,329.22 174,815.78 162,455.14 198,495.65

Reference: China Real Estate Statistical Yearbook.

reasons is that Guangdong has the highest population and the
largest GDP among all provinces in China. It is already a well-
developed economy and has a huge market, which attracts
foreign investors to invest in the province. Guangdong shared an
even larger portion of all investment from Hong Kong, Macau and
Taiwan enterprises. This is mainly due to the fact that Hong Kong
and Macau have become Special Administrative Regions (SARs) of
China. These two SARs are located nearby Guangdong, and hence
have very close economic ties with Guangdong. However, recently,
Guangdong’s dominance in investment from foreign enterprises
was challenged by Liaoning, the largest economy in northeast
China. In 2005, Liaoning’s share of all investment from Hong Kong,
Macau and Taiwan enterprises and other foreign enterprises was
only 7% and 10% respectively, but the proportions increased
sharply to 15% and 17% respectively in 2010. In 2009 and 2010,
Liaoning even surpassed Guangdong to become the province
receiving the largest amount of investment from other foreign
enterprises. This is because Liaoning belongs to Bohai Sea Coastal
Region, which has a lower cost than the Pearl River Delta and the
Yangtze River Delta regions, so it attracts more and more foreign
investors in recent years. The two largest municipalities in China,
Shanghai and Beijing, shared a relatively large portion of all in-
vestment in 2005, but the portion decreased over the next five
years. This may be due to the fact that their costs are higher than
most of the other areas in China. In particular, Beijing experienced
a much sharper drop in its share of all investment from 2005 to
2010 than Shanghai did. Beijing even dropped out of the top 10
regions for other foreign enterprises in 2010. This is because
Shanghai is designated to be the financial centre in the world by
the Chinese government, so its importance is greater than Beij-
ing’s. Besides, we can also observe that there was a significant rise
in investment in some fast growing areas like Sichuan and
Chongqing. This has two implications. Firstly, foreign enterprises
kept on exploring new markets to diversify their risks. Secondly, in
recent years, the Chinese government has put more effort in
developing the economy of those new, fast growing areas, and has
opened the real estate market in those areas to foreign developers.
The China Western Development implemented in 2000 is a typical
example of developing those new, fast growing areas. This leads to
more investment in those areas.
236 E.C.M. Hui, K.K.K. Chan / Habitat International 43 (2014) 231e239
Determinants of foreign investment in China’s real estate
market
Data source
In this section, we use a panel regression model to investigate
the determinants of FDIRE in China. We use annual data of 30
provinces/municipalities from 2005 to 2010 (the latest available
issue of China Real Estate Statistical Yearbook is the 2011 issue,
which contains the data in 2010), giving a total of 180 observa-
tions. The province Tibet is excluded because it recorded no
realized direct real estate investment by Hong Kong, Macau,
Taiwan or other foreign enterprises during the period of obser-
vation, according to China Real Estate Statistical Yearbook. All
other 30 provinces/municipalities are included in order to reflect
the complete picture. The variables are defined as in the following
Table 5:
The explanatory variables
1. GDP
This variable represents the market demand/size, which is a
crucial factor of foreign investment. This is usually measured by
GDP, GDP per capita, GNP, GNP capita or the growth rate of
these factors. When the local economy grows, more business
opportunities are created for foreign investment and hence in-
vestors’ confidence is boosted. Most studies found that market
demand/size is a significant positive factor on FDI (Cheng &
Kwan, 2000; Coughlin & Segev, 2000; Dees, 1998; Havrylchyk
& Poncet, 2007; Ren & Pentecost, 2007; Sun et al., 2002). As
in most of the previous studies, we use GDP per capita as the
measure, and we expect it to have a positive effect on FDIRE (see
Table 5).
2. WAGE
This variable represents the average wage level of workers.
Being the most populated country in the world, many of China’s
industries are labor intensive, including the real estate industry.
Labor cost is an important component of the total cost of many
companies. Therefore, a lower average wage level attracts more
foreign investment. Many studies found that higher wage levels
had a negative impact on FDI (Cheng & Kwan, 2000; Coughlin &
Segev, 2000; Ren & Pentecost, 2007; Sun et al., 2002). On the
Table 5
The sources of data (note: all values are nominal values).
Variable Measure
FDIRE Realized amount of direct real estate investment from
foreign enterprises (including Hong Kong, Macau and
Taiwan enterprises)
GDP GDP per capita
WAGE Average wage of staff and workers
PRICE Average house price per unit area
LAND Average price of land purchased by enterprises for real
estate development per unit area
TRANS Length of railway and highway per unit area
FE No. of foreign real estate enterprises (including Hong Kong,
Macau and Taiwan enterprises)
TOURIST No. of foreign tourist arrivals in a year
INT Average lending rate (>5 years) in a year
EX Average exchange rate of RMB in terms of US$
COASTAL 1: The province is a coastal province or Beijing
0: Otherwise
other hand, according to Branstetter and Feenstra (1999), multi-
national firms in China tend to pay a wage premium to their
workers in order to hire quality workers. Hence higher wage may
reflect better labor quality. In fact, Zhao and Zhu (2000) found a
positive significant relationship between wage and FDI. However,
the majority of previous studies found a negative relation between
the two factors, so we still assume that WAGE has a negative effect
on FDIRE (see Table 5).
3. PRICE
This represents the average house price per unit area. Previous
studies found mixed results on the relationship between property
prices and foreign investment in real estate markets. He et al.
(2009), Zhu, Sim, and Zhang (2006) and Bagchi-Sen (1995)
found that increasing property prices in a country would
enhance foreign investment in the real estate sector of that
country. Some articles showed the opposite result. For example,
Rodríguez and Bustillo (2010) found a long-run and negative
relationship between property prices and foreign real estate in-
vestment in Spain. Since positive relation dominates slightly
among previous studies, we expect that PRICE has a positive effect
on FDIRE (see Table 5).
4. LAND
This represents the land cost, and is calculated by dividing
the total price of land purchased by the total area of land pur-
chased. Since higher land cost increases burden on real estate
enterprises and hence finders foreign investment in real estate,
we expect that LAND has a negative effect on FDIRE (see
Table 5).
5. TRANS
This measures the degree of transportation infrastructure/
accessibility of transportation network. A higher convenience of
transportation of a place, a stronger incentive for foreign investors
to invest in that place as the travelling time is reduced. Thus time
cost is saved. The majority of previous studies found a positive
significant effect of transportation infrastructure on FDI (Cheng &
Kwan, 2000; Havrylchyk & Poncet, 2007; Sun et al., 2002). In this
paper, as in Havrylchyk and Poncet (2007), we take the length of
railway and highway per unit area as the measure. We assume that
TRANS has a positive effect on FDIRE (see Table 5).
Unit Source Expected
effect on
FDIRE
Yuan China Real Estate Statistical Yearbook
Yuan/person National Bureau of Statistics of China (2014) þ
Yuan/person National Bureau of Statistics of China (2014) 
Yuan/m2 China Real Estate Statistical Yearbook þ
Yuan/m2 China Real Estate Statistical Yearbook 
km/km2 National Bureau of Statistics of China (2014) þ
Unit National Bureau of Statistics of China (2014) þ
Person-times National Bureau of Statistics of China (2014) þ
Actual value The People’s Bank of China 
US$ National Bureau of Statistics of China (2014) 
Map of PRC þ
 E.C.M. Hui, K.K.K. Chan / Habitat International 43 (2014) 231e239 237

6. FE performers of FDI inflow. During the period 2007e2010, the coastal

This variable represents the number of foreign real estate en-
terprises in China, and can be used as a measure of degree of
openness of China’s market. Instead of including all foreign en-
terprises, we include real estate enterprises only to obtain a more
reliable result. As described in Section 1, the Chinese government
has launched a series of policies to open the market since the
open-door policy in 1978. As a result, more foreign enterprises
were attracted to invest in China and hence FDI in China
increased. More foreign enterprises obviously lead to more foreign
investment. Hence we expect that FE has a positive effect on FDIRE
(see Table 5).
7. TOURIST
This represents the number of foreign tourist arrivals in a year.
By Fereidouni and Al-mulali (2012), international tourism allows
potential investors to have a first-hand experience on the host
country’s environment and to obtain information about the in-
vestment opportunities available. Moreover, detailed information
of the host country’s competitors, regulatory environment, work
ethic and culture are necessary in investors’ FDI decisions. Tourism
improves existing research into FDI and hence can contribute to the
expansion of new FDI in host country (Sanford & Dong, 2000).
Therefore, we expect that TOURIST has a positive effect on FDIRE
(see Table 5).
8. INT
We use interest rate as a proxy for financing costs. When in-
terest rate rises, it costs higher for foreign enterprises to borrow
money. Therefore, foreign investment will be hindered. Previous
studies generally showed a negative relationship between
financing cost/interest rate and foreign investment (including the
real estate sector). Zhao (2003) showed that China’s relatively high
costs of capital borrowing hindered its FDI inflow. He et al. (2009)
and Rodríguez and Bustillo (2010) found that higher financing cost/
long-term interest rate had a negative effect on foreign investment
in real estate. Since the majority of previous articles, like Rodríguez
and Bustillo (2010), Fereidouni and Masron (2013), used long-term
interest rate, we select the People’s Bank of China’s lending rate of
the longest term e over 5 years, as the measure. We expect that INT
has a negative effect on FDIRE (see Table 5).
9. EX
This represents the average exchange rate of RMB in terms of US
Dollar in a year. As Sirmans and Worzala (2003) showed, foreign
investment in real estate is sensitive to exchange rates. When the
currency of a host country appreciates, the cost of investing in that
country increases and hence foreign investment will be hindered.
Therefore, we expect that EX has a negative effect on FDIRE (see
Table 5).
region shared 75% of China’s total FDI inflow (although declined
from 89% during the period 1987e1990). We expect that COASTAL
has a positive effect on FDIRE (see Table 5).
The results
We set up the following fixed effects model:
LnFDIREit ¼ a þ b1 LnGDPit þ b2 LnWAGEit þ b3 LnPRICEit
þ b4 LnLANDit þ b5 LnTRANSit þ b6 LnFEit
þ b7 LnTOURISTit þ b8 LnINTt þ b9 LnEXt
þ b10 COASTALi þ li þ 3 it ; (1)
where li is the province-specific factor, and 3 it is the error term.
Applying linear regression to Eqn. (1), the following Table 6
shows the result performed by Minitab:
2
From Table 6, both R2 and R have high values of around 0.95.
This indicates that the explanatory variables have a strong
explanatory power on FDIRE. The p-value of the F-statistic is
extremely small, showing that the model (Eqn. (1)) fits the data
very well. The sign of the slope coefficients of the five explanatory
variables are as expected except for LAND. The reason for this
exceptional result may be due to the following: the soaring land
cost in China indicates an increase in demand for land, which is
triggered by the rise in demand for housing (see the explanation
later in this section). Thus there is a positive relationship between
LAND and FDIRE. Only two factors are significant at 5% level. FE is
the most significant factor on FDIRE, having a p-value of less than
0.001, showing that the number of foreign real estate enterprises
has a highly significant and positive effect on FDIRE. This coincides
with the fact mentioned in introduction that in recent years, as
China continued to open up its market to foreigners, more foreign
enterprises are attracted to invest in China and hence its FDI inflow
increases. GDP is the second significant factor, with a p-value of
0.036, reflecting China’s strong economic growth has pulled up FDI
inflow to its real estate market. It is well known that market de-
mand or size of a country, usually measured by GDP or related
statistics, has a strong and positive impact on the country’s FDI
inflow, but how can it affect specifically on FDI in the real estate
market, as in China’s case? This can be explained by the following:
China’s strong economic growth led to urbanization. Through
commodification and marketization of land-use rights and building
construction, China’s economic reforms have stimulated urban
physical development (Zhu, 2002). Hence the process of urbani-
zation has sped up. Urbanization has a significant effect on the
housing market. According to Liu (2011), if the urbanization rate
increases by 1% per year, then it is estimated that 13 to 15 million
Table 6
The estimation result of the fixed effect model (Eqn. (1)).
2
R2 R F-statistic p-value
0.953 0.940 74.59 <0.001

10. COASTAL Variable Coefficient t-statistic p-value

GDP 1.2699 2.12 0.036

This is a new regional factor which is often neglected in previous WAGE 0.4299 0.48 0.635
studies. It indicates whether a province/municipality is nearby the PRICE 0.3111 0.79 0.431
LAND 0.1189 1.27 0.208
coast or not. We assign a value of 1 to a coastal province/munici-
TRANS 0.1779 0.92 0.360
pality and 0 otherwise. Note that Beijing is assigned the value 1 FE 0.7797 3.69 <0.001
because it is near to the coast and is surrounded by Hebei and TOURIST 0.0462 0.30 0.762
Tianjin, both of which are coastal. Normally, coastal areas attract INT 0.0576 0.16 0.874
FDI. According to China Daily (2012), China’s first cluster, which EX 1.276 0.75 0.454
COASTAL 0.8911 1.32 0.189
includes virtually all coastal areas, contains 9 of the top 11
238 E.C.M. Hui, K.K.K. Chan / Habitat International 43 (2014) 231e239
people would buy a new home of average area 30 m2 per person.
Furthermore, for the current 602 million people living in urban
areas, about 10% of them would change a new apartment of average
area 40 m2 per person. This makes up a total of 700 million m2 of
new housing demand each year. The rise in housing demand at-
tracts more foreign investment in the real estate market.
Further discussion of the implications of the results is given in
the next section.
Implications
The section discusses the implication of FDI in China’s real estate
market based on the results in Section 4 as follows:
1. In the past, China was a closed, planned economy. Most real
estate enterprises in China were state-owned enterprises.
However, since the open-door policy in 1978 and further pol-
icies to open the market thereafter, the barrier to enter the
market in China has gradually been removed, so more and more
foreign real estate enterprises enter China’s real estate market.
China’s control on the real estate market has loosened, allowing
foreign real estate developers to do business in China more
freely than before. The real estate market in China is becoming
more and more opened. Our model in Section 4 confirms this
result as the number of foreign real estate enterprises is found to
be the most significant factor affecting China’s FDIRE. More
foreign real estate enterprises entering China indicate a higher
degree of openness of China’s real estate market. This attracts
more foreign investment. The increasing FDIRE in China reflects
that China is gradually transforming from a planned economy to
a market economy.
2. Economic development is one of the main drivers of the growth
in foreign investment in Chinese real estate market in recent
years. Our result in Section 4 shows that GDP per capita is a
significant factor stimulating foreign investment in China’s real
estate market. We then analyze that China’s rapid economic
growth has sped up its urbanization process, which has driven
up the demand for housing. This attracts more foreign real es-
tate developers to invest in China.
Looking to the future, China’s economy is forecasted to grow
strongly in the next couple of years, but the outlook of other major
economies in the world is not so bright: U.S.A. is recovering slowly,
but will face the problem of “fiscal cliff” soon, while the European
countries have to deal with the European sovereign debt crisis.
With such a doom outlook, it is hard for these countries to attract
foreign investment. In comparison, China is a safer place to invest
in, so the trend of increasing foreign investment in Chinese real
estate market will continue. In fact, this trend of foreign investment
represents the shift of power from the west to the east.
3. From Table 6, the factor COASTAL has a positive coefficient as
expected, showing that coastal areas attract more FDIRE. This is
consistent with the result in Table 4 that most of the top 10
provinces of FDIRE in China in 2010 are coastal provinces.
However, there was a significant increase in investment in those
fast growing areas in recent years. This trend is expected to
continue in the future because as those core areas become more
and more developed, they will become more saturated, so the
room of further development is rather small. However, those
newly developed regions, especially those in western China, still
have plenty of capacity for development, so the market potential
is much larger. Moreover, as those originally undeveloped areas
become more developed, more FDI will be attracted into those
areas. China Daily (2012) also reported that the costal region’s
share of China’s total FDI has declined slightly from 1987e1990
to 2007e2010, but FDI in the central region has increased
significantly over the same period. This trend is likely to
continue in the future.
4. This paper shows the unexpected result that land cost has a
positive effect on FDIRE. From Table 6, the variable PRICE also
has a positive coefficient. Thus both house price and land cost
affects FDIRE positively. This reveals that the booming of China’s
real estate market attracts its FDIRE. On the other way round,
FDIRE can affect the real estate market, too. Quite a number of
foreign real estate enterprises hold some properties for invest-
ment purposes. When FDIRE increases, foreign enterprises earn
more money and hence will raise their investment on proper-
ties. This will stir up the property market. We suspect that the
increasing FDIRE in China may be a cause of overheating of its
real estate market. However, more evidence is needed to prove
this. Nevertheless, the Chinese government should be aware of
and monitor foreign investors’ speculative activities on the
property market in order to stabilize the house price.
Conclusion
In this study, we use a panel regression model to investigate the
determinants of FDI in China’s real estate market during the period
2005e2010. From our results, the most significant factors boosting
China’s FDIRE are the increasingly openness of China’s market and
China’s strong economic growth. The newly incorporated regional
factor COASTAL in the model reflects that foreign developers still
invest mainly in coastal areas of China. However, there is a growing
trend of investment in those fast growing areas in recent years.
Furthermore, it is suspected that FDIRE may have a side effect of
overheating the real estate market. While continuing to open the
market to attract foreign investment, the Chinese government
should also monitor the real estate market carefully to stabilize the
house price.
Acknowledgement
We are grateful for the financial support from the PolyU Internal
Research Grants (Project #4-ZZC8, Z02Z and G-YH96).
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