Long awaited rules curbing foreign investment in China’s real estate market have apparently been released to real estate firms although they are yet to be officially announced.

Under the rules, individuals must reside in China for one year before buying property, while companies – and institutional buyers – must be registered in China, with registered capital of 50% of the purchase price, up from 33%.

Morgan Stanley, which plans to triple its investment in Chinese property to US$3 billion this year, is apparently the first to lose out under the new regime. According to a well-placed source, the company has been ordered to comply with the new rules before the regulator will give approval for an acquisition that the institutional investor likely felt was already in the bag.

The move comes as Beijing tries to dampen investment in speculative high-end property and encourage the development of affordable housing.

A Ministry of Construction survey this year found the average size of new flats in 16 main cities was more than 120 square meters, much bigger than what an ordinary household could afford. Homebuyers have grown increasingly annoyed at soaring prices - a Beijing Normal University study found 70% of China’s urban residents could not afford to buy a new apartment, based on average housing prices in east China.

Overall housing prices in 70 large and medium-sized cities rose 5.8% year-on-year in May, after climbing 5.6% in April and 5.4% in March. Prices for new properties climbed 6.1% year-on-year in the same period. At the same time, 123 million square meters of real estate remained unsold at the end of March, up 23.8% on the first quarter of 2005. In the residential sector, 69.8 million square meters of housing lay empty, representing about 700,000 unoccupied apartments.

As prices get further and further out of the grasp of domestic buyers, and apartments remain unsold, developers are increasingly trying to target offshore buyers. The strategy has proved successful, with foreign investment transactions in the mainland real estate market totaling US$5.4 billion in the first quarter this year, more than triple the same period last year.

It is this flow of money that the regulator feels is creating a situation whereby prices are climbing despite market force of supply and demand. In the absence of a market correction, the government feels it has a duty to step in.

It is easy to blame foreigners when the going gets too good. Rather than clamping down on the free flow of capital, the government should move faster to open up alternative investment channels.

According to a report by Jones Lang LaSalle last year, some 21.1% of China’s newly rich urban citizens - a total of about 15 million individuals - said they preferred to invest in real estate than bank savings or stocks.

Alternative investment instruments provide a much better hope for cooling real estate flames than any amount of government tinkering and finger pointing.

Watch now as the foreign investors find a way around the new barriers, and watch as prices continue to rise - just as fast as the new, unoccupied apartments.