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Reviewing the Evolution of Property Rights in China
By Jialin Zhang
August 1, 2008


To promote a market economy, a society must have unambiguous, secure and alienable property rights. For over two thousand years, the concept of private property rights in China never existed. After the founding of the People's Republic of China (PRC), land ownership in China became dualistic: urban land belonged to the state, and rural land was owned by the collective. Although the economic reforms of the late 1970s produced a mixed ownership system, property rights are not clearly defined even now. This is why China now has an underdeveloped, inefficient market economy that has created widespread corruption, abuse of power, and an expanding gap between the rich and the poor.

 

The Chinese Perception of Property Rights

 

According to institutional economics, property rights define effort and ownership for protecting one's property. There also must be recognition, respect, and approval of these rights by others. The core of Roman law defined the principles of property rights, and they protected sacred individual rights and real rights.

 

In Ancient China, however, as it was said, "all land under heaven belongs to the emperor, and all people on the earth are the subjects of the emperor." No tradition of legality and contract for individuals existed.  Civil law was never agreed on until the Republican era in the 1920s, nor was there any national cultural awareness to respect others' individual rights and to cultivate those rights. It is not surprising that no rigid property rights structure formed during Chinese history. The protracted disputes in recent years about intellectual property rights between the U.S. and China signify that Americans understand very little about the origins of this unique Chinese culture.

 

At the founding of the PRC in 1949, its leaders adopted a Soviet model for allocating social resources by state plan. No private person could claim his/her rights of immovable property. Moreover, there did not exist any system of private property rights to provide individuals with incentives to work hard, save, invest and manage. The central planning system developed serious problems, and China's economy was on the brink of collapse in the 1970s. Since the economic reforms of 1978, China began abandoning its planned economy and building a "socialist market economy."

 

The Chinese government allowed different forms of ownership, and there are now more than 20 types of ownership, including private firms, collective firms, joint stock companies, and foreign owned enterprises. Private property has been recognized and protected. Initially, there was no provision for private property in the 1982 PRC Constitution. Afterwards, the Constitution was amended several times. Article 11 of the 1999 amended Constitution reads: "Individual, private and other non-public economies that exist within the limits prescribed by law are major components of the socialist market economy." The 2004 amended constitution was even clearer. Citizens could legally obtain private property, and that right must not be violated; in case private property was expropriated, the government must provide compensation.

 

Since the 1980s, the Chinese leadership and academics have paid more attention to property rights. The first official recognition of the importance of property rights was cited at the Third Plenum of the 14th Chinese Communist Party (CCP) Congress in 1997. It stated "clear-cut property rights" is an important element in the contemporary corporate structure. Policy-makers and academics now realized that without clear-cut property rights, a market economy could not be established, nor could sustainable economic growth take place. These rights, which were formulated in the market transaction, should be approved and protected by law.

 

The Problem of Uncertain Property Rights in China's Economy

 

Although it is widely recognized that efficient property rights will promote economic growth, in fact, efficiently used property rights, as noted by Douglas North, have been unusual in history. In the case of China, the property rights were never clearly defined.

 

Obscurity and confusion over property rights have existed in state-owned enterprises (SOE) for years. It is unclear who is the real owner of a SOE. Is it the State Council, an agency, or local government? According to the government statutes, the State Council enforces the ownership of all state assets on behalf of the state, while central and local authorities "manage" these assets at each corresponding level. The management, having asymmetric rights and responsibilities, are not responsible for their performance. The initial obscurity of the property rights has resulted in unlimited utilization of state assets and the inefficient allocation of resources, finally causing staggering losses of state assets.  Thus, the property rights problem has become an Achilles Heel in China's economy.

 

During economic reforms, most Chinese SOEs were restructured to become stockholding companies. But their ownership equity is still in the hands of the state. This new structure made the state the largest shareholder, and gave it new opportunities to misuse the assets of non-state medium and small shareholders.   

 

Scholars have complained that the property rights of state assets are unclear, and responsibilities are not fairly demarcated. Compared to the non-state shareholders, the largest state shareholder has no ultimate beneficiary and responsible person for managing its property rights. The various state agencies are "agents" rather than owners of state assets. Handing over the controlling power of the structured SOEs to them will only increase their transaction cost without any tangible benefit. Moreover, these managers are selected and appointed by the government, rather than through market competition. They are responsible to the government rather than the interest of the non-state shareholders. Both government and underdeveloped markets lack an effective mechanism to monitor them. It is one of the root causes of low efficiency and widespread corruption.  

 

Farmland in rural areas is owned collectively by township, village, and groups. The individual farmer has no ownership over the land he or she uses. In practice, collective ownership is performed by the villagers' committee elected by the villagers. The committee, which plays a dual role as agent of local government and agent of land property rights, contracts land to farmers for cultivation. But "collective" is an abstract term, which does not identify the real representative and enforcer of the property rights. Moreover, the state imposed strict restrictions on the farmers' land ownership: transfer, mortgage, and lease of this land are prohibited. As Zhou Qiren, a Chinese economist, has pointed out, the only solution to improving agricultural efficiency and increasing the farmers' income is to make clear who has the property rights: such as rights of land use, rights of cultivation, rights for buying and selling farm products, rights for trading and transferring the land to other users according to comparative advantage and division of labor, etc. If the farmers enjoyed full ownership of the land, they would cherish the land, take meticulous care of it, make long-term investments, pursue maximum profit in the market, and transform land from being a means of agricultural production to becoming capital assets, which can be transacted in the market for achieving the land's maximum added value.

 

The 2007 Property Law*

 

In 1998, the Standing Committee of the National People's Congress (NPC) decided to take piecemeal steps to formulate a final civil code, namely, one step to draft a property law. The first draft was completed in 2000 for comments and public hearings. Since then, the process has involved great controversy. Many in the Chinese legal community feared that the proposed law would facilitate privatization and asset stripping of SOEs, and legitimate those assets that have been acquired illegally. Others argued that the law undermines the socialist principle of state ownership of property. The draft was originally scheduled to be adopted in 2005, but it was removed from the legislative agenda, and again failed in its readings at the 2006 session. The final version of the law, containing a number of revisions and additions to address these concerns, was formally passed in the 2007 session and was made effective on October 1, 2007.

 

The Property Law is drafted as comprehensive legislation about property. It contains five sections: General Principles, Ownership, Usufructuary Rights, Right of Security and Possession. Although far from being perfect, and, maybe, leaving more questions unanswered than answered, this law is the first earnest attempt by the Chinese regime to manage and clarify property rights in China.   

 

For the first time, the law clearly placed protection of private property on an equal footing with that of state-owned property and collectively owned property. Article 4 of the law explicitly states that the property right of the state, collective, individual or any other right holder shall be protected by law, and shall not be infringed upon by any entity or individual. This reflected a respect of individualism and basic human rights, thus facilitating the creation of a market economy.

 

The Law required a uniform registration system for immovable property. According to Article 9 of the law, the creation, alteration, alienation or termination of rights to an immovable asset shall not become effective until it is registered. The procedures for registration of immovable are simplified, and the power of administrative organs in the process of registration is to be reduced.

 

But it should be noted that since all lands belong to either the state or the collective, no private ownership of land exists in China. No individual or organization may own land. There are, however, land use rights for individuals, which include the rights to the contracted management of the land, the use of construction land, and the use of housing. The user has the right to possess and use the land, to receive benefits from it, but has no right to dispose or sell it. Before the property law was passed, the right to the use of the land was on a term basis. For example, individuals in urban areas could buy and own houses, condominiums or apartments for only 70 years. It was unclear what the owner could do with his/her property after 70 years. In response to this public concern, the new property law specifies that the right to use residential land "shall be renewed automatically" upon the expiration of the use term. This means the owner could use the dwelling site almost indefinitely.

 

The law also specifies that "subject to the provisions of the laws, collective-owned land, properties of juristic persons and individual housing and other immovable property can be expropriated for public purpose or in the public interest." But the expropriated objects should be compensated to the full extent.

 

In summary, the Property Law is perhaps the single most important legislation in the process of drafting the Chinese civil code since the founding of the PRC. The passage of the law itself signifies that it has recognized the universality and necessity of safeguarding individual property rights, thus laying down a material foundation for equitable market transaction.

 

Some Unresolved Property Rights Issues

 

Nevertheless, as economists and legal experts have pointed out, the new Law leaves many problems unresolved. Many provisions are either ambiguous or need to be further clarified. The property rights in the state sector are still not well defined. For example, who would represent the "state," or "entire people," to exercise the ownership of the state assets? What is the nature of those enterprises in which the state still has investments?

 

More legal questions remain about collective property. According to the new Law, collective land is not transferable. It is unclear whether the homestead of farmers can be transferred freely, and whether the contracted rights of collective land could be reinvested and mortgaged. The property rights of the farmer's own house are also ambiguous. According to the law, farmers are entitled to build houses on their homestead. But when farmers sell these houses to outside buyers, no title certificates will be issued. On the other hand, the village and township officials can easily requisition and transfer the collective-owned land to urban developers without farmers' consent. Although the law allows local authorities to requisition certain collective-owned land for the "public interest," it is not clear who has the authority to expropriate property from collectives and individuals. Should it be the central government, ministries, local authorities, or any agencies? The Law sets no standard or requirement to guarantee a fair and just process for property requisition. The terms of "public purpose" and "public interest" are not clearly defined either, and are subject to various interpretations. This leaves the door open to abuse by local officials to pursue their selfish interests.

 

Another issue is compensation. The farmers who live on that land should get reasonable compensation. But in practice, the compensation is unbelievably low, and it cannot cover the relocation cost and daily living expenses of the farmers whose land was expropriated. Again, no standard for compensation is provided in the Law. This was the main cause of many social conflicts between the local authorities and the requisitioned homeowners who were dissatisfied with their low compensation.

 

Government studies indicate that land has been confiscated from more than 50 million farmers, often by corrupt officials working in concert with developers. These farmers, having lost their land, actually became unemployed without any social welfare support. That illegal behavior has caused frequent mass demonstrations, petitions and protests in rural areas, and constitutes one of the reasons for China's social upheavals.

 

It is a legitimate concern that people want to see how the Law will be implemented. Many scholars agree that most unresolved issues are not only related to the legal realm, but they also are closely connected with China's political ideology. It may be addressed and rectified, from time to time, along with political reforms.

 

Fortunately, the Chinese government and the CCP acknowledged the urgency and necessity of further clarifying property rights, and they have made every effort to move in that direction. It is expected that special laws, statutes, and regulations will be enacted in the near future to address problems still unresolved under the current law.

 

* The term of Property Law, or Wu Quan Fa, which was passed in China in 2007, literally corresponds to the Law of Real Rights, apparently borrowed from the 1896 German Civil Code. There is no corresponding term in Anglo-American law. The closest English translation might be Property Law. But one should note the "Property" in Anglo-American law is not equal to "Real Rights" in continental law.

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Jialin Zhang, a visiting fellow at the Hoover Institution, Stanford University, specializes in international economics, China's economic reforms, and U.S.-China relations. He received his degree at the Moscow Institute of International Relations in 1960 and served as a senior fellow of the Shanghai Institute for International Studies. He is the author of numerous articles, essays and books. His recent books are U.S.-China Trade Issues After the WTO and the PNTR Deal----A Chinese Perspective, Hoover Institution Press, 2000; The Debate on China's Exchange Rate----Should or Will it be Revalued? Hoover Institution Press, 2004.
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