Monday, November 06, 2006
Chinese Real Estate Law
Some key points to take away:
China's legal system is developing so rapidly that the few [written] sources that exist are obsolete almost immediately.... Those Chinese citizens who have developed expertise in the emerging legal and business systems of China are more apt to be profiting from it than writing treatises about it.A lot of the experts he dealt with were curious to see what he learned so they could get more overall knowledge themselves. The National People's Congress is still debating the nation's first comprehensive property code. This debate is exposing serious ideological splits within the Chinese Communist Party.
Nothing is time-tested. There are no seasoned experts in the field. The most experienced people have been at it for not much more than a decade; they've only experienced boom times. As an interesting similar example, most Chinese people driving cars today haven't been driving for very long at all and have the driving experience of a Western teenager, regardless of their actual age.
...the Chinese legal system is surpisingly undeveloped given how advanced the Chinese property markets have become. A casual observer viewing Shanghai's skyline for the first time would assume that Chinese property law has matured significantly since Mao's death, but this assumption is only partly correct.It's sounds a lot like how rules and regulations regarding Internet activities have rapidly evolved chaotically and have always lagged behind the actual activities themselves.
The legal systems is far from transparent, enforcement of the laws that are on the books is inconsistent and commonly graft-ridden, and the rule of law is viewed as a Western concept that does not interlock well with Chinese traditions.There is a lot more reliance on personal relationships than in the West. There's a big gap between the laws on the books and how law is practiced. The results of anyone's actions may be difficult to predict.
Legal changes are often incremental and only dealing with the immediate needs rather than stepping back and solving the overall abstract issues.
Even with the free markets and relaxed regulations, the Chinese legal system still has a lot more "government involvement, intrusion, and interference than American real estate professionals typically experience."
The background history section has an interesting quote:
Show me a Chinese centenarian and I will show you a person who has lived through unbelievable change in her lifetime. She will have been born in the waning days of the Qing Dynasty, with the Last Emperor soon to succumb to the republican revolution of 1911. A quarter-century of upheaval followed, marked by four years of a shaky republic, twelve years of regional control by warlords, and the establishment of the Nationalist government in 1928, alongside the growth of the Communist Party. Nationalist control of much of China would gradually give way to invading forces from Japan [often very brutal and for nearly a decade].... Four years of uncertainty and civil war would follow the departure of the Japanese. Then would come the quarter-century of Mao Zedong's rule, difficult and often brutal years marked ultimately by the nationalization of all land in China.Then there was the era of Deng Xiaoping, with the emerging market based economy and huge improvements in the standard of living for large numbers of Chinese. The creation of transferable land use rights was in 1988. The Land Administration Law was adopted in 1986 and revised in 1998.
Within the Shanghai area, China built a city the size of Chicago in less than 15 years.
Very often a local government entity will own part of the land use rights jointly with a limited liability company. It then "uses that control to gain an ownership interest in the entity that will develop the land." In theory, they aren't supposed to profit from the activities after 1990. Sometimes, state-owned enterprises (SOEs) have land use rights from local governments and then contribute these to a jointly owned development entity.
In the very early real estate market, SOEs or the government were the only players with any expertise.
The government's dealings with land use rights seem to be far from arm's length. Some land use rights are sold for far less than they're worth [which is often difficult to objectively know ahead of time] and the purchaser can resell parts of it for a profit and then continue with a project with essentially free land use rights. This might often be associated with "connections" with the right people.
The government entities hold the land use rights but often don't have the development expertise. The developers willing to "share the spoils" with the government or certain members of the government can get the deals. In other cases, the corruption is more subtle. Multiple sources indicate that the city of Shanghai uses land use auctions which are now very clean and transparent. However, good connections are likely to remain critical for the foreseeable future. And the people who get established early are likely to retain a competitive edge after things get more transparent. Very often those people are the ones who push for clean rules to keep others from playing the same tricks going forward. [Someone argued that this is what the US is doing globally]
It sounds a lot like your basic "local corruption" state of affairs that you'd find in some seedier out-of-the way parts of the US.
Not too many years ago, developers paid contractors slowly, forcing them to extend interest-free loans and assume some of the risk if the project failed (again, sounds like the usual bag-of-tricks in seedier untransparent dealings in the US). The government has been cracking down on this to slow the overheated expansion. But contractors figured a way around it.
The developers I interviewed generally wish to make money and seemed a bit surprised that an American would see any need to ask a Chinese developer about this.Academic people are such a riot.
Apparently, the only example of a citizen's input into any aspect of land use planning was due to a 12 year old girl's suggestion for the 360+ degree circular exit ramp on the Nanpu Bridge in Shanghai (I recall seeing that 8 years ago on the cover of an engineering book here). Generally, the government does whatever it wants without citizen input, 12 year old bridge designers not withstanding.
Obviously it's in the local governments' best interests to increase development to generate revenue from land use rights and taxation on the resulting businesses. The central government has reasons to want to avoid property booms and to preserve agricultural land (peasant revolts, strategic food supplies).
Residential property land rights can go up to 70 years.
Commercial property land rights can go up to 40 years.
Industrial property rights up to 50 years.
[the residential being green, commercial being purple, and industrial being yellow for those who remember their Sim City games]
There's a 2 year use-it-or-lose it requirement that is often ignored or modified. There may be restrictions of all sorts placed on the land rights.
Land use rights are paid entirely in advance, some say you can't borrow money for this (although that would be hard to rigorously enforce, I'd imagine). Landlord-tenant law doesn't apply.
After expiration, it's difficult to know what exactly will happen in most cases, especially since the laws are so new. But in short-term cases that are expiring soon, the government seems to be willing to negotiate an extension or else compensated for the buildings it is now taking possession of. Over time, it may be that land use rights transform into something like Western ground leases or else something like Western property taxes in the US.
Municipalities use land use rights to keep a flow of revenues. It all strikes me a lot like a giant game of Sim City.