Mortgage Law in China: Comparing Theory and Practice

I. INTRODUCTION China is in the puzzling position of developing free markets while still nominally subscribing to Communist ideology. (1) Nowhere is this tension more evident than in its real estate sector. (2) 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. (3) At the same time, Communist doctrine prohibits private ownership of property, and all land in China still is owned by the state or by agricultural collectives. (4) This doctrinal confusion does not seem to be holding back the real estate market, particularly in China's major cities, which have been booming for most of the last two decades. China has adopted numerous written laws and regulations since the 1980s, but property law has lagged behind other areas of civil law. The first Chinese law focusing specifically on property rights became effective on October 1, 2007, (5) 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. (6) China has only haltingly begun to adhere to international role-of-law standards, and there still is heavy reliance in China on guanxi, or personal relationships and connections. (7) Chinese property rights also are limited by communitarian considerations in ways that are unfamiliar to Americans. (8) These factors ensure that property law as it is actually practiced in China diverges from the published legal rules. Thus, those who have been buying, selling, and lending against Chinese real estate have been operating in a world of significant legal uncertainty. (9) Moreover, while a newcomer to American law can learn much by reading statutes, cases, treatises, and academic articles, there are few similar sources in China. This Article examines Chinese mortgage law as it actually operates in the field, focusing on both legal and business issues. (10) During the summer of 2005, I interviewed dozens of Chinese and Western lawyers, bankers, real estate developers, government officials, judges, economists, real estate consultants, law professors, business professors, real estate agents, law students, and recent homebuyers. (11) Their comments offer reliable insights into how China's real estate markets truly function. The discussion that follows draws on these conversations to examine China's budding mortgage law practices, including how they developed, how they comport with or differ from written laws, and what questions they leave unanswered. (12) I first visited China as a Fulbright Lecturer at Shanghai Jiaotong University Law School during the spring of 2003. Amazed by the staggering scale of the 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 returned two years later and conducted this field research into the legal and business grounding for the current Chinese real estate boom, interviewing a wide variety of experts in various segments of the Chinese real estate industry. These professionals come from a broad range of fields and backgrounds, with their only shared attribute being a willingness to meet with an inquisitive foreigner. (13) Several features of the blossoming Chinese real estate sector quickly became apparent. These characteristics remind American lawyers interested in China that their assumptions about the American real estate industry will not necessarily apply in a nation with a strikingly different history and legal culture. First, the legal and business communities have fashioned their business approach largely from scratch. There is little received wisdom, today's leaders have few mentors on whom they can rely, and many so-called experts still operate by trial and error. Second, while China's market is more open today than it has been in at least a half-century, it is far from a free market. …