The United States and Great Britain may not be the only world economies whose growth gets crimped by a runaway housing market.

A newly initiated state survey of foreign investment in China’s soaring real estate sector has sparked fears of new curbs aimed at halting zooming home prices in that Asian nation.

According to the state-run shortwave radio service, China Radio International, the survey was initiated late last month by China’s State Administration for Industry and Commerce, also known as SAIC. It was announced via an "urgent notice" on the official Web site of the SAIC’s Registration of Foreign Invested Enterprises unit.

The announcement spawned some major worries because so few actual details were released.

Government Mum on Survey’s Status or Purpose

At a time when China’s central government is already worried about general inflation and a speculative atmosphere that continues to hang over its stock market, restrictions on foreign investment in real estate are yet another thing that could lance the speculative bubble that many experts believe has been fueling that country’s dramatic economic and stock-market growth over the past year or so.

Because it’s still a developing economy – even with its impressive size – China is largely incapable of fueling and maintaining a "bubble" economy without substantial foreign capital. With stock prices there having already slumped, speculators who have been profiting from China’s spectacular growth are likely fearful that restricting foreign investments could touch off a financial-markets implosion similar to the bursting of the dot-com bubble in U.S. stocks in 2000, or like the bursting of the U.S. housing bubble last year.

It’s happened before. In the early 1990s, emerging markets enjoyed a massive run-up in one year – with some stock markets, like that of Hong Kong, soaring as much as 90% in less than 12 months. But when concerns about the economic health of key emerging economies surfaced, foreign investors pulled out of those stock markets, and they plummeted – and subsequently failed to budge for several years after that.

That’s not likely to happen in China. In an interview late last year, investment guru and Asia expert Jim Rogers said that even if China’s stock market were to plummet, that country’s economy would remain healthy, and would continue to advance unchecked. Rogers generally knows what he’s talking about: He and his family now live there; and his latest book, "A Bull in China: Investing Profitably in the World’s Greatest Market," – a detailed look at a very complex market – has just debuted and is expected to be another best-seller for the former hedge-fund whiz.

Questions About "Survey" Abound

Citing a well-informed source, the Shanghai Security News reported Monday that the real estate survey was initiated last November after China’s Ministry of Construction started to survey existing policies designed to restrict foreign investment in China real estate. But sources with the SAIC’s Shanghai and Beijing branches maintained that the survey was actually initiated only to collect and compile national statistics for internal government use.

The Registration of Foreign Invested Enterprises has declined comment on the status and the purpose of the survey. But industry insiders say that the government may be making preparations to institute further policies.

Throughout last year, China’s government developed a package of policies that were aimed at preventing a flood of foreign money from washing through that country’s real estate market. Some of those policies actually put some real teeth into an approval process that foreign investors must go through before they can buy real estate in China. The policies also made it easier to supervise the flow of foreign money into the housing market. And the ultimate goal, obviously, was to make sure that a torrent of uncontrolled foreign capital didn’t leave China’s housing market looking [figuratively speaking] like a coastal city in the aftermath of a tsunami.

Climbing the Wall of Worry

Official figures from China’s National Bureau of Statistics showed there might be a cause for concern, unveiling a rapidly accelerating inflow of foreign money into a sector already on the cusp of over-revving.

In July 2006, China raised the required ratio of registered capital in property developers’ overall investment plans for a development, a major step in its effort to regulate its real estate market and to cap speculation. At the time, China also placed tougher restrictions on residential property purchases by foreign institutions and individuals. Under the rules it put in place, only foreign institutions that would be establishing branches or representative offices in China – and individuals working or studying in China for more than one year – could purchase apartments for their own use.

The regulations have had some effect, but not nearly as much as was hoped.

From January to November, real estate developers in China [including players from Hong Kong, Macao and Taiwan] used $53.9 billion of foreign capital, 71.9% more than during the same stretch in 2006.

And domestic investments were already fanning the speculative flames. During that same period, slightly more than $435.4 billion [equal to 3.2 billion yuan] flowed into China’s property sector from investors at home and abroad – an increase of 40.8% from the year before.

[China differentiates between foreign and domestic investors based largely on the currency deployed. Dollar-denominated investments are considered foreign investments, even if they originate from Hong Kong or Macao, both China territories. Yuan-denominated investments are viewed as domestic, even if they emanate from overseas. China, as is true of many Asian nations, has a huge global network of "Chinese" investors, some of whom are China-born citizens now living abroad, and others who are foreign-born Chinese who are relatives or colleagues of people still in China. Those overseas networks are a crucial element of the emergence of Asian countries as global economic powers].

Despite a tighter monetary policy – China’s central bank boosted lending rates six times last year amid efforts to slow investment flows and rein the economy from a gallop to a trot – China’s real estate climate index still advanced to 106.59 in November, up 0.85 points from October and up 2.67 points from November 2006.

However, the central government’s focus will stay with affordable housing for low-income households. In November, it urged local authorities to reserve at least 70% of the land designated for residential construction for low-rent units or smaller, cheaper homes.

The inventory of unsold – but still marketable – buildings dropped 4.5% in November, falling to 117.97 million square meters. If property demand escalates, price escalations could steepen.

Analysts say the inventory decline could be the result of developers concentrating more on building affordable homes, and decreasing their focus on creating additional luxury properties. After all, the central government has been focusing on affordable housing for lower-income families. In fact, back in November, the government urged local authorities to reserve at least 70% of the land designated for residential construction for development of low-rent apartment-type units, or smaller, lower-priced houses.

[Editors Note: To see how you can obtain a free copy of Jim Rogers' latest bestseller, "A Bull in China: Investing Profitably in the World's Greatest Market," please click here.]

News and Related Story Links:

• China Radio International/CRIEnglish.com:
  China Probes Foreign Investment in Real Estate

• Money Morning News:
  Investing Guru Jim Rogers Predicts "Worst" U.S. Recession in Years; Urges Investors to Shift Into Commodities

• Money Morning News:
  China Hikes Interest Rates For Sixth Time This Year; Bumps Subsidies to Farmers

• Money Morning News:
  U.K. Markets Mirror U.S. Woes

• Money Morning News Analysis:
  As China Soars, Prices Are Rising More Than Most Realize

• Money Morning Investment Analysis:
  Jim Rogers Warns of Fallout From Fed Cuts; Says to Seek Profits in Commodities, Asian Currencies.

The unexpected resignation of Japanese Prime Minister Shinzo Abe on Sept. 12 spooked the Tokyo stock market. But as the dust clears, it’s obvious that investors shouldn’t worry.

The new prime minister, Yasuo Fukuda, isn’t about to change an economic policy that is currently working quite well. That’s especially true when that policy is very much in line with his longstanding personal beliefs. And because Fukuda is likely to further the economic policies of his predecessor, Japan will continue to represent an island of stability in a global economy that’s still riding the subprime waves.

For shrewd investors, that scenario spells opportunity. And we can suggest several ways to play it. Let me explain …

What Really Matters in Japan

There’s really only one issue that Japan investors should be tracking: Public spending. Until 2001, Japan had expanded the public sector like madmen trying to spend their way out of their decade-long recession. That not only didn’t work; it left Japan with a debt load equal to 170% of Gross Domestic Product, and a public spending deficit equal to about 8% of GDP.

In 2001, Junichiro Koizumi took over. In addition to a real fondness for Elvis Presley, he had a high respect for free-market capitalism and an aversion to expanding the public sector. He brought the annual deficit down, and real growth resumed.

Abe, who took over in September 2006, continued Koizumi’s policy and produced an excellent budget last December, which promised a surplus by 2011. The problem was that Abe wasn’t all that great at running a government. He lost several ministers to scandal, one to suicide, and the ruling LDP party did poorly in the midterm elections in July. And at a mere 52, he may have been too young for tradition-laden Japanese tastes.

The new guy, Yasuo Fukuda is 71, a "proper" age for a Japanese prime minister. He was said to be a moderate – meaning no visits to the Yasukuni shrine and better relations with China. Although his age might suggest that he favors public spending, I don’t think that will be the case. Here’s why…

Like Father, Like Son…

You see, Yasuo Fukuda is the son of Takeo Fukuda – Japan’s prime minister from 1976 to 1978. He was also considered to be the father of the 1980s Japanese boom. He was an opponent of the corrupt big spender Kakuei Tanaka (1972-74) who gave Japan lots of infrastructure, 34% inflation, and the Lockheed bribery scandal. Conversely, Takeo Fukuda cut the budget deficit, reduced inflation, and laid the foundation for the long 1980s boom.

Significantly, Daddy Fukuda also gave Koizumi his start. Koizumi got his first political job as Fukuda’s secretary in 1970, and the two became close – close enough that Daddy Fukuda was best man at Koizumi’s wedding. Yasuo Fukuda himself was in Koizumi’s cabinet for three years and is a good friend of Koizumi. Thus his father’s political tradition and his family’s closeness to Koizumi strongly suggest Yasuo Fukuda is not about to reject Koizumi’s tight budget policies. Just because he’s 71 doesn’t mean he’s stupid!

The opposition is calling for an early general election, but since the LDP has a two-thirds majority it doesn’t need to call one until 2009. Fukuda may decide to call an election next spring but, presumably, only if he thinks he’ll win it. Japanese public spending and debt should stay controlled.

Issue #2 Under Control

The other big issue in Japan is interest rates. Short-term rates have been close to zero for far too long and need to be around 2% or so, in line with the economy’s growth potential. Japanese savers are getting ripped off, and it’s about time that changed. And with lots of Japanese nearing retirement age, the country’s savings are huge.

Bank of Japan Governor Toshihiko Fukui has been trying to push short-term interest rates up, but hasn’t been allowed to raise them since they went to 0.5% in February. Abe was worried that a rise would be politically unpopular. If Fukui raises them, probably to 0.75%, at the next Monetary Policy Committee meeting October 11, you’ll know two things:

• Fukuda realizes higher short-term rates are a good thing.
• And he believes the subprime mortgage crisis is irrelevant to the Japanese economy, which remains in pretty good shape.

The stock market may well dip as rates rise, but that will be a short-term reaction. In the long run higher rates mean a stronger economy, a stronger yen, and probably more foreign and domestic money coming into the Japanese market.

Outside the world of Japanese politics, the market’s recent drop was largely caused by the subprime mortgage crisis, to which Japan has almost no exposure, probably the lowest of any major economy. Since Wall Street, the epicenter of the problem, hasn’t dropped much, it seems unfair that innocent Japan has fallen more.

The one genuine reason for the drop is that the yen has been strong recently, moving from 120 to 114 against the dollar, and likely to strengthen further, particularly if Fukui raises interest rates. As the dollar is weak overall you probably don’t want to buy companies exporting to the U.S., since their profit margins will be squeezed. Three suggestions therefore:

• streetTracks SmallCap Japan ETF (NYSE:JSC.) which invests in smaller Japanese companies, which are mostly domestic and can benefit from continued growth in the Japanese economy without being buffeted by international problems.
• Kirin (OTC:KNBWY:PK), Japan’s largest brewery. It’s traded on the dreaded "Pink Sheets" in New York, but has a market cap of $12.5 billion in Tokyo. Kirin’s over 20 times earnings, so a bit pricey, but it has focused its growth on East Asia and Oceania, which looks the way to go.
• Third, Japan’s largest investment bank Nomura Holdings (NYSE:NMR), whose share price has suffered recently because Western investors don’t like the industry – or its modest holdings of subprime U.S. mortgages. Nomura is however dominant in the domestic market and reasonably priced at 15 times earnings.

News and Related Story Links:

• Wikipedia:
  Shinzo Abe.

• BBC News Asia-Pacific:
  Profile: Shinzo Abe.

• MarketWatch:
  International ETFs Take New Ground.

• FT.com:
  Tokyo Market Hits High Mark.