Letter from... China

China-watchers had a field day on 16 March, when the National People’s Congress passed what many observers are calling a ‘private property law’ during its annual legislative meeting.

‘The property of the state, the collective, the individual and other obligees, is protected by law, and no units or individuals may infringe upon it,’ the law stated.

The new law drew international attention by assuring equal protection to state and private properties in a country that prides itself on ‘socialism with Chinese characteristics’. But ideological debates aside, the letter of the law is hardly a revolution for investors. For the real-estate and finance industries, it is important primarily because it confirms the basic elements of a market system for Chinese real-estate.

‘We can all be a bit more confident in China’s real-estate market now that the basic principles are quite clear,’ said Guillaume Rougier-Brierre, a partner at Gide Loyrette Nouel’s Beijing office. ‘Before, there were major questions about real-estate rights in general, especially whether or not they were transferable. Now we know they’re transferable and can be leased. It lays the foundation for a real functioning market.’

While the term used to describe the law, wuquanfa, means the ‘law of the rights of things’, and technically refers to all tangible property, this law’s main implications are for real-estate and land.

The law will create a national registry for property titles to cut down on fraud and concurrent sales of the same property. It will also improve transparency for transferring land-use rights, mandating an auction process subject to a minimum price. That should cut down on some of the corrupt deals that have plagued the countryside in recent years, as farmland has been expropriated for urban development.

Legal scholars and real-estate experts are now trying to decode what the law will mean for the everyday work of doing business in China when it takes effect on 1 October. Many details will not become clear until after that date, when analysts expect to see a flood of new regulations and provisions from government ministries dictating exactly how to implement the new law.

Patrick Randolph, co-director of the Center for Real Estate Law at Peking University and a law professor at the University of Missouri, said: ‘This law provides some certainty over the enforceability of financial laws here. The Chinese laws themselves are fine – they’re actually very similar to mortgage laws in the US. The problem here is enforceability.

‘You can buy a phony land-use right certificate in China almost as easily as you can a pirated DVD,’ Randolph added, which is why it is essential that China preserves public access to information contained in the new, more transparent official registry system.

On the financial side, Randolph said he also expects the law to usher in a broader, more creative basis for financing real-estate developments in the near future, as Western lenders arrive seeking new market opportunities. Options might include lockbox financing of both leasehold and land-use right mortgages, where tenants pay rent directly into a fixed account that is held as collateral, or mezzanine financing, though that arrangement would require further legislation.

A property law has been proposed numerous times, most recently in 2006, but was delayed a year at the time because of strong opposition within the party, whose conservative wing argued that the concept of private property contradicted China’s socialist foundations too strongly. This year’s version was clearer about the primacy of state ownership of land, but also tacitly acknowledged the need for basic legal protections for property owners in an increasingly market-based economy.

The law is also notable for what it does not do. It does not address how to handle intangible property, including intellectual property rights. It does not move towards a right to land ownership. Investors can now buy and transfer land-use rights with terms of up to 70 years, and can generally own buildings on that land, but the land still belongs to the state. It also steers clear of a touchy issue of whether to charge fees for renewing those land-use rights for successive terms.

‘Some issues were just too politically sensitive to address clearly right now,’ said Rougier-Brierre. ‘Renewal of land-use rights, for example – if you extend those rights for a second term of use, will you have to pay land-use fees again? If not, then it’s like a perpetual lease, and too close to outright ownership.’

While the law is not exactly a carte blanche guarantee of ownership rights, it is certainly a step in the right direction for China’s steady progression towards a market economy.

Lauren Keane is a freelance journalist based in Beijing.