China plans to restrict purchases of real estate by foreign investors to reduce speculation and prevent a property bubble, a government official said.

New rules defining what type of overseas investor can buy property may be announced this month, Lin Zheying, deputy director general of the commerce ministry's Foreign Investment Administration, told reporters in Beijing today

The regulations may threaten plans by investors including Citigroup Inc. and Morgan Stanley to increase holdings of Chinese real estate after Shanghai housing prices more than doubled since 1999. Premier Wen Jiabao has curbed lending to cool an economy that grew 10.3 percent in the first quarter and to prevent a drop in property prices from causing loan defaults.

"The government is worried that overseas investment is bringing too much foreign currency into China and that it will cause property bubbles,'' said Liu Yang, who helps manage $3 billion of Asian assets at Atlantis Investment Management Ltd. in Hong Kong. "But people are buying because they see real growth prospects and real returns from Chinese real estate.''

Policies to cool foreign property investment come amid a raft of other measures Wen is implementing to cool a credit-fueled investment boom driven by swelling inflows of foreign capital.

China's reserves of foreign currency have doubled over the past two years to $875 billion as the trade surplus widened, leaving the financial system awash with cash. The government's policy of controlling the yuan's gains against the dollar forces the central bank to issue treasury bills to soak up surplus funds.

The International Finance News said in early June the State Administration of Foreign Exchange may use "technical'' restrictions such as tightening transaction settlement procedures and strengthening supervision of real estate companies receiving foreign funds or listing overseas.

With foreign investors poised to pour billions of dollars into Chinese real estate, restricting investment from overseas could help slow growth in foreign exchange reserves and ease pressure on property prices.

Top of the List

"Funds from all over the world are trying to get into Asia Pacific and on top of their list is China,'' Guy Hollis, head of U.S. real estate consultant Jones Lang LaSalle Inc.'s investment arm. "About $30 billion overseas funds and also money from the Mideast want to find a home in China.''

Speculation that China will let its currency gain at a faster pace increases the lure of property. China revalued the yuan almost a year ago and abandoned a peg to the dollar. The currency has climbed 1.4 percent against the dollar since then.

"One way that you can bet on an appreciation in the currency is to own assets in China, and real estate has been the favorite one with capital gains being pretty good,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney.

Overseas institutions bought property worth of $3.4 billion in China last year, the SAFE said in a report on April 28. That didn't include "lots'' of transactions that can't be tracked and confirmed, said Remy Chan, Shanghai-based head of markets at Jones Lang LaSalle.

Foreign Funding

Foreign investors are entering China's property market by investing in Chinese developers or forming a locally registered entity such as a private equity fund to acquire existing properties. In some cases, foreign lenders are involved in financing such operations, said Jun Ma, head of China research at Deutsche Bank AG in Hong Kong.

Overseas institutional investors are planning to sell real estate investment trusts on overseas markets such as Hong Kong and Singapore after acquiring the income-producing properties in China, said Stanley Chan, managing director of Stanley & Partners Investment Management Ltd.

"The return can be much higher than betting on a stronger yuan,'' he said.

Over the past five months, international investment banks and real estate funds have announced plans to invest more than $5 billion in Chinese property.

Citigroup, Morgan Stanley

Citigroup's property unit plans to increase investment in China's real estate market 10-fold to $800 million in the next three years, Stephen Coyle, chief investment strategist at Citigroup Property Investors, said June 6.

Citigroup Property Investors will buy office, retail and industrial properties, Coyle said in an interview. The New York- based unit will also invest in residential projects in "secondary cities'' where prices have more potential to rise, he said.

Morgan Stanley, the world's third-largest securities firm by market value, plans to triple its investment in Chinese property to $3 billion this year, Sonny Kalsi, global head of real estate business at New York-based Morgan Stanley, said in an interview in Tokyo on March 13.

"It's possible'' that the new measures could delay investment plans by foreign companies such as Citigroup and Morgan Stanley, said Deutsche Bank's Ma. "It will be very difficult to distinguish who are the speculators and who are the ones with real demand. It's possible that the policies could hit both.''

Richard Tesvich, Citigroup's Hong Kong-based spokesman, declined to comment.