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China's capital Beijing has banned businesses from setting up offices in residential buildings, a move that will have a deep impact on the property market.

The Beijing Municipal Administration of Industry and Commerce said in a circular dated June 19 that effective immediately no new companies will be granted business licenses if they plan to establish offices in residential buildings.

The new policy allows companies already operating in residential buildings to remain where they are.

Beijing Daily quoted property analysts as saying the move will eventually force small and medium companies to move to lower-end office buildings when they need to expand. This will likely cause price increases for office space and reduce demand and prices for residential buildings.

Industrial sources estimate that one third of private businesses registered in Beijing in 2004 were operating in residential buildings.

Reliable information shows that 60 percent of the companies registered in the Chaoyang District in the first quarter of this year are based in residential buildings.

Residential buildings have in recent years become more and more popular with small companies because they are cheaper than office space to rent.

Beijing authorities, however, have faced increasing complaints from residents, who are annoyed by the noise and large number of people around their homes. Residents also complain that company offices in their building make them less secure and cause excessive wear and tear on facilities such as lifts.