Modern Chinese Real Estate Law

Property Development in an Evolving Legal System

Gregory M. Stein

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317094715
• Edition: 1
• Topic: Law
• Subtopic: Real Estate Law
• Index: Law

With massive growth taking place in the real estate industry, how can China develop a free market and private ownership of land while still officially subscribing to Communist ideology? This study uses fieldwork interviews to establish how the Chinese real estate market operates in practice from both legal and business perspectives. It describes how the market functions, which laws are applicable and how they are applied, and how a nation can achieve dramatic economic growth so rapidly while its legal system is so unsettled. The book demonstrates how China is drawing on the world for ideas while retaining a domestic system that remains essentially Chinese, and how the recent revitalization of China's real estate market has confounded the predictions of many developments economists.

PART I
Introduction

Chapter 1

The Excitement of Modern China

The Excitement of Modern China

China’s development during the past quarter-century has been astonishing. Outside observers marvel at China’s ability to maintain double-digit economic growth year after year while expressing concern about the West’s rising trade imbalance with this important partner.1 Western consumers enjoy lower and lower prices for Chinese-made goods ranging from T-shirts to iPads, while American manufacturers decry the ability of Chinese factories to underprice their few surviving American competitors. Trading partners welcome China into the World Trade Organization2 while wondering what effect that nation’s economic expansion will have on the price and availability of critical commodities, particularly oil.3 Meanwhile, China is in the puzzling position of developing raucous free markets while still nominally subscribing to Communist ideology.4

Nowhere is this tension more evident than in China’s real estate sector. Real estate developers are building award-winning office towers, modern shopping malls, and five-star hotels, and tens of millions of urban families are scraping together the money to buy their own apartments.5 These developers have been meeting these residential needs by replacing decaying urban housing stock while also adding new units to house the tens of millions of workers who have migrated from rural areas to cities. The nation has also built or rebuilt its infrastructure, from roads and bridges to subway systems and airports.

Shanghai, China’s key financial center located near the mouth of the Yangtze River, is said to be the home to one-fifth of the world’s construction cranes, which local residents refer to as China’s national bird.6 Developers are ordering structural steel at a rate that is causing shortages and price increases around the globe. Shanghai residents speak of little else but their desire to purchase residential apartments as soon as possible, so as not to miss out on a bonanza that may not recur in their lifetimes.7 All of this activity is particularly remarkable given that the government is firmly controlled by a single political party that remains Communist at least in name, Communist doctrine continues to prohibit the private ownership of real property, and all land in China thus remains owned by the state or by agricultural collectives. This doctrinal confusion does not seem to be holding back the real estate market, particularly in China’s major cities, which have been flourishing for most of the last two decades.

The Dearth of Property Laws in the 1980s and 1990s

Westerners tend to assume that a stable legal system is a precondition to this type of robust development and that property is the “guardian of all other rights.” After all, why would anyone make a substantial investment in Chinese real estate if the nation did not appear to afford legal protection to property rights, did not make clear what an owner’s contractual remedies were, did not have a developed bankruptcy law, and provided a judiciary that was less than transparent?

Nonetheless, while China has adopted numerous written laws and regulations since the 1980s, property law has lagged behind other areas of civil law. The first Chinese law focusing specifically on property rights did not become effective until October 1, 2007, which means that China’s breakneck real estate development during the preceding two decades occurred in a nation with no published law of real estate.8 China has only haltingly begun to adhere to international rule-of-law standards.9 Moreover, there still is heavy reliance in China on guanxi, or personal relationships and connections.10 Chinese property rights also are limited by communitarian considerations in ways that are unfamiliar and surprising to many Westerners. China had few laws regulating property during this time of extraordinary growth, and property law as it has actually been practiced diverges from these published legal rules. Thus, those who have been buying, selling, and lending against Chinese real estate during this era have been operating in a world of significant legal uncertainty.11

Despite this shortage of laws relating to property, private and public investors have spent hundreds of billions of dollars investing in real estate in a nation that, during most of this period, had no formal property law. Investors purchased and improved assets without knowing just how much legal protection those assets enjoyed, while banks lent money with only imperfect assurance that they would be repaid. How can a huge nation modernize so rapidly and dramatically when its legal system furnishes so much ambiguity? And how can all of this happen in a nation that still purports to subscribe to socialist ideology?

The Goals of this Book

This book offers a detailed account of how the Chinese real estate market actually operates in practice, from both legal and business perspectives. My goals are twofold. First, I seek to establish and describe how the Chinese real estate market, with so few written laws, actually functions. How do real estate professionals operate on such a large scale when they are not sure what the applicable law is or how it will be applied? Second, I aim to address the broader question of how a huge nation can achieve such dramatic levels of economic development so rapidly while its legal system is still so unsettled. In what ways does China force us to reconsider the traditional model of economic growth and expansion, which assumes that legal and institutional development is a prerequisite to economic growth?

In four visits to China since 2003, I have interviewed dozens of Chinese and Western experts who are currently taking part in what can be described without exaggeration as one of the greatest real estate booms in world history.12 My conversations with these real estate developers, bankers, government officials, judges, practicing lawyers, real estate consultants, economists, real estate agents, law professors, business professors, law students, and recent homebuyers provide critical insights into how a major nation is quickly transforming itself from an economic backwater into a self-styled “socialist market economy.”

Although I also rely on more traditional methods of legal scholarship throughout this book, a straightforward doctrinal approach would be incomplete and misleading. I quickly realized that I could develop an accurate grasp of how China’s real estate market operates in practice only from those who are working in that market. Chinese real estate and business laws are still in an early stage of development, Chinese legal and economic institutions are evolving rapidly, and there is an intensely strong cultural tradition of reliance on personal relationships rather than rule-of-law principles. My goal is to establish how particular aspects of Chinese real estate practice are maturing with what appears to be tremendous success against the backdrop of a young legal system.13

Research Methods

This book examines Chinese real estate law as it operates in the field, focusing on both legal and business issues. I first had the opportunity to visit China during the spring of 2003, when I served as a Fulbright Scholar at Shanghai Jiaotong University Law School. Amazed by the staggering amount of real estate development in Shanghai, I became curious as to how China was succeeding in building new structures and rebuilding crumbling infrastructure so quickly in a partial legal vacuum. I had never before seen real estate development on the scale I observed during this initial stay and knew immediately that I wanted to understand how this nation—with a legal system, history, and cultural background so dramatically different from those of the United States and other Western nations—was managing to accomplish a complete rebuilding of its structures and infrastructure so rapidly.

I quickly learned that China’s legal system, particularly as it pertained to real property, was both new and rapidly changing. China at that time did not yet have a comprehensive property law on the books. Furthermore, the legal landscape was evolving so rapidly that the few legal resources that did exist became obsolete almost immediately.

In addition, the legal academy in China still was recovering from the excesses of the Cultural Revolution, which left China with a shortage of legal academics. Most of the scholars I met seemed to be interested in other legal disciplines, and the burgeoning property field had barely started to attract academic attention. This means that there are few experts in property law and real estate finance in China even as the nation is grappling with important structural questions about how to harmonize private ownership of property with Communist principles.

Those Chinese citizens who have developed expertise in the emerging legal and business systems of China are more likely to be profiting from it than writing treatises about it. In fact, when I began to meet with real estate experts in China, more than one of my counterparts expressed gratitude that I had undertaken this project and indicated how great a need there is for more written material in this field. Many outstanding scholars write about real estate, or about real estate law, or about recent developments in China, and I have relied on their excellent work throughout this book. But I found few scholars—in China or in the West—who have developed expertise in the combined topic of Chinese real estate law. As a result of this shortage, many of my sources in China were extremely curious to hear what I had learned from others with whom I had already spoken and insistent that I send them copies of my finished work. One real estate developer expressed his frustration that not only are there no useful published sources in the field of Chinese real estate law, there also is no one else conducting research with a goal of creating any such sources.

This scarcity of written information led me to conclude that the best way to comprehend the current real estate climate in China and the massive changes in recent decades is to speak to the professionals who are operating within the country. These are the only people who have the expertise and insight that might be found in the United States in a law school faculty or in a bar association library. I returned to China three more times in the ensuing years with the goal of interviewing as many people as I could who were knowledgeable about Chinese real estate law and business as actually practiced.

During these visits, I interviewed more than fifty experts in the real estate field. Legal experts with whom I spoke included practicing lawyers, law professors, judges, government officials in legal positions, and law students. I also met with non-lawyer business experts such as real estate developers, bankers, consultants focusing on the real estate sector, economists, professors of business, real estate agents, and government officials in non-legal positions. Most of these experts are Chinese—some of whom have studied or lived in the West—with the rest being Westerners currently residing in China. Nearly all of the specialists I met were able to converse in English at some level, but in several cases I made use of a translator, including some meetings with persons who speak reasonably good English but felt more comfortable with a translator present. Many of the people with whom I spoke are recent homebuyers themselves.

The classic example of field research into the development of informal norms is Robert Ellickson’s Order Without Law.14 Ellickson observes that “rural residents in [California’s] Shasta County were frequently applying informal norms of neighborliness to resolve disputes even when they knew that their norms were inconsistent with the law.”15 He concludes from this that, “[i]n many contexts, law is not central to the maintenance of social order.”16 Following Ellickson’s suggestion, I sought out a wide range of viewpoints to the greatest extent possible. “Instead of interviewing many persons who saw the problem from the same perspective, I sought out less...