Real estate prices in Beijing, Shenzhen, Guangzhou, Shanghai and other cities are currently skyrocketing, while large numbers of newly built apartments lie empty.

This defies the conventional wisdom that property prices are determined by supply and demand.

A number of factors contribute to this, including secret deals between real estate developers and local governments, as well as the entry of overseas speculators to the domestic property market.

Although overseas capital accounts for a rather small portion of total investment in the real estate sector, it plays a disproportionately big role. This is because the price of real estate, which, apart from being one of the basics in people's lives, is regarded as an investment, is largely set by the expectations of the investors, or house buyers. Overseas capital, small in proportion as it is, helps largely drive up the market expectations and, in turn, real estate prices.

This can be seen clearly in the dropping of mortgage-based housing purchases. Statistics show that 91 per cent of housing transactions rely on mortgages. But mortgage-based sales started to drop in 2004 when mortgage loans reached 470 billion yuan (US$57 billion). The figure dropped further in 2005 to 260 billion yuan (US$32.1 billion) when the government began to implement macroeconomic measures in this regard. In the first quarter of this year, mortgage loans stood at a mere 25.6 billion yuan (US$3.16 billion), half the figure in 2005 and a mere 20 per cent of the amount in 2004.

Despite this dramatic drop in housing consumption, the domestic real estate market has remained extremely buoyant. For example, housing prices in Beijing and Shenzhen rose by 20 per cent in the first quarter of this year.

It should be noted that large sums of overseas foreign-exchange remittances have continued pouring in to Guangdong, Fujian and Zhejiang provinces and Shanghai in recent years. Zhejiang and Shanghai witnessed a particularly sharp rise in foreign-exchange remittances, up more than 40 per cent annually. This largely explains the sharp upward curves in these areas' real estate prices.

At the same time, buyers from the Hong Kong Special Administrative Region are clamouring to buy housing on the Chinese mainland. In 2005, for example, Hong Kong people bought 12,500 units of housing in neighbouring Shenzhen.

Some overseas investors have set their eyes on office buildings on the Chinese mainland, pouring US$720 million into these projects in 2005. Many overseas players have become deeply involved in the mainland's real estate market. And some mainland real estate developers with significant overseas shares are stepping up their efforts to get listed on overseas stock exchanges.

World-class players such as Goldman Sachs and Morgan Stanley bought US$3.4 billion worth of property on the Chinese mainland last year. Citibank plans to double its real estate investment on the mainland, which means its input in this area will hit US$800 million in the coming three years.

This sharply increasing overseas investment in the domestic real estate sector could give rise to property bubbles. Once they have burst, these bubbles could deal a telling blow to the Chinese economy as a whole.

In view of all this, it is vital and necessary to restrict the speculative activities of the overseas capital.

The vast majority of countries ban housing speculation, taking into account that housing is one of the basics on which people's livelihoods rely. Many have enacted laws to limit housing speculators' profits. Among the 187 member economies of the International Monetary Fund, 137 have worked out measures to restrict the entry of overseas capital to their real estate markets.

These restrictions take different forms in different countries, such as market-access limits and restraints on the links of transactions or housing ownership.

Faced with a fledgling real estate market, the Chinese Government has the responsibility to guarantee that every citizen has a roof over his or her head. Therefore, laws and policies are required to crack down on overseas funds' speculative activities on the domestic property market.

The entry of overseas capital to the domestic housing market should be subjected to rigorous controls, except for direct investment.

As a matter of fact, foreign direct investment in the domestic real estate market dropped 15.6 per cent year-on-year in the first quarter of 2006.  This shows that overseas capital entering the mainland property market is largely speculative money, which should be checked at all costs.

One of the lessons learned from the 1997 Asian financial crisis demonstrates that giving free rein to the international capital's housing speculation is bound to trigger domestic monetary crises.

The government ought to impose restrictions on overseas capital's speculation on the domestic real estate market.

The country's land property market yields fat profits, which are acquired not so much by entrepreneurship and managerial skills as by taking advantage of scarce land resources, exploiting cheap labour and making use of institutional loopholes in the existing real estate market.

Under such circumstances, allowing large amounts of overseas capital to enter the domestic property sector is virtually handing over State assets lock, stock and barrel to overseas speculators. This could lead to a grave loss of the nation's wealth, harming public interests and disrupting the economic balance.

Imposing restrictions on overseas investment in the domestic real estate market does not necessarily mean slamming the door to foreign capital. Instead, it means redrafting the rule of game in terms of overseas real estate investment. A number of things, therefore, need to be done, such as scrapping the preferential tax regime enjoyed by overseas capital in buying housing, redefining the criteria with regard to foreign funds' entry into the domestic property market, and levying taxes on speculative housing purchases.

Restrains ought to be put in place to control overseas capital's entry to the domestic real estate market and see that foreign funds are not used in housing speculation.

The author Yi Xianrong is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.