Vol. 25 No. 1 (January 2015) pp. 11-13
MODERN CHINESE REAL ESTATE LAW: PROPERTY DEVELOPMENT IN AN EVOLVING LEGAL SYSTEM by Gregory Stein. Surrey, England: Ashgate Publishing Limited, 2012. 211pp. Hardcover $118.79, ISBN: 978-0-7546-7868-7.
Reviewed by Melissa L. English, Assistant Professor of Business Law in the College of Business, Western Carolina University. Email: firstname.lastname@example.org.
In 1988 China amended its Constitution to allow the creation of transferable land use rights in the real property the Chinese government had spent decades nationalizing. This constitutional change, along with a handful of rudimentary implementing statutes, effectively opened the real estate development market in China and that market has exploded since, with Shanghai and Beijing among the most rapidly developing real estate markets in this, or any other, time.
In MODERN CHINESE REAL ESTATE LAW: PROPERTY DEVELOPMENT IN AN EVOLVING LEGAL SYSTEM, Professor Gregory Stein, from the University of Tennessee College of Law, attempts to unravel the conundrum at the heart of this break-neck development: how and why is the real estate market developing so quickly in China, when the law that permits it is still largely undefined and unsettled? Pointing to law and development theory that seems to require well-settled law and strong institutions as a pre-requisite for such rapid development, Stein embraces a theory of Chinese “exceptionalism” – against the odds the Chinese real estate market has exploded without either well settled law or strong legal institutions.
Stein’s field work on both of these points is compelling. Over a series of four visits to China beginning in 2003, Stein conducted more than fifty interviews with legal and non-legal professionals working within the real estate and related markets in Beijing and Shanghai– from lawyers, judges, and professors to real estate developers, real estate agents and bankers. The author is clear that he is not producing a rigorous statistical analysis or definitive legal hornbook; rather, his data is intended to be a “field survey of how the participants in a major surging and surging industry operate against a background of legal and policy ambiguity.”
It is in service of this purpose that the book makes its strongest contribution. Stein provides a complete picture of the Chinese real estate market, from the ins and outs of the process of acquiring the right to use land, to the legal and financing institutions that permit development, to the functioning of various real estate and leasing markets. Stein reminds the reader of the fundamental role that property rights, and the form in which property is regulated, plays in the structure of related industries and institutions, and the distribution of capital in a society. While perhaps not the author’s purpose, the broad sweep of the Chinese real estate and development industries laid out in MODERN CHINESE REAL ESTATE would make the book equally at home in a comparative politics or finance course, or as a handbook for various business and legal practitioners.
While its descriptive purpose is at center stage, Stein does not ignore his exceptionalism hypothesis, spending considerable time describing the more startling characteristics of the Chinese real estate market that defy expectation and, in some instances, logic. For example, Stein points out that while the Chinese government has done a brisk business selling land use rights for periods of 40 or more years, there is no law or other regulation that dictates what happens at the end of the prescribed use period. Will the Chinese government take back the use right to the land and sell it to the next developer for another royalty? Will the developer be granted some kind of first right of renewal, and, if so, for how much? What rights will the developer, or a related lender, be left with in the structures constructed on the land? And, more important to Stein’s hypothesis, why in the world are developers clamoring and purchasing use rights – and ponying up significant private capital to build structures on this real estate - with this kind of uncertainty? [*11]
These questions are not inconsequential. The sale of use rights provide significant revenue streams to otherwise unfunded local governments. Theoretically, Stein argues, these governments will need to resell use rights to maintain revenue streams. Without any certainty as to how this process will occur, or how much it will cost, how are developers evaluating prices for use rights or securing financing to build structures on these lands? Stein’s interviewees suggest there are no easy answers to these questions other than the momentum of the market, and widespread faith in the Chinese government’s backing of the real estate market and financing.
This uncertainty extends into the residential real estate market. Stein describes both the development and astonishing velocity of a residential real estate market fueled in equal parts by rising wages, the lack of open investment markets, and burgeoning capitalism. In this market, Chinese citizens line up in advance to purchase residential units as investments, never to be occupied, and most often simply to be flipped for a quick and substantial profit. The result is ever-rising residential real estate prices that have far outstripped the earnings of most Chinese people. Nevertheless, government owned banks continue to make loans to finance these purchases using lending criteria that seem completely unrelated to credit-worthiness. Stein deftly demonstrates that this is all balanced precariously on the assumption (by banks, their government owners, and the Chinese people) of ever rising real estate prices. Stein seems incredulous that the Chinese cannot look across the Pacific to see the folly of this assumption.
Stein touches on some social issues that have arisen with the development of the real estate market, the most pressing of which is relocation. With the advent of the transferable land use rights the Chinese government found themselves relocating citizens as local governments sought to develop parcels with old structures. If the government sells the land use right of a parcel with an existing residential structure then the government must relocate the individuals who are living within the structure. Relocation has always included compensation, but Stein describes how these individuals have become much more sophisticated in negotiating this compensation and, as a result, the prospect of relocation has become a dominant factor in both offering and valuing a parcel’s use right.
Drawing on the broader law and development literature of Douglas North, Hernando de Soto, Joseph Stiglitz, Jeffrey Sachs and others, Stein poses a tantalizing question at the heart of his “exceptionalism” hypothesis: does China prove that there is an undiscovered flaw in traditional models of law and development theory, all of which seem to require strong and predictable property rights enforced by neutral arbiters as a necessary pre-condition for development of traditional societies? While perhaps the right question, Stein remains frustratingly noncommittal in his conclusions: “the only way to explain accurately how China has managed to accomplish so much in recent decades –all traditional models aside – is to recognize that in different regards, each of these possible explanations for China’s failure to adhere strictly the model is correct… China has managed to prove and disprove features of traditional law and development theory.” This is a missed opportunity to push into new territory in law and development theory, and seems fundamentally at odds with the exceptionalism hypothesis he enthusiastically embraces in the early chapters.
A true comparative approach (admittedly outside of the author’s purpose) would give Stein’s book some theoretical heft. While Stein considers the property rights regimes of a few other developing countries, most notably Hernando de Soto’s work in Peru, he fails to consider other countries that have real estate markets that seem to be more direct analogues to China. The country that kept coming to this writer’s mind was Mexico - similar to China, Mexico holds its agricultural lands in ejidos or agricultural “communities” somewhat similar to China’s agricultural collectives. Through constitutional reform in 1917, Mexico effectively nationalized all land holdings and prohibited foreigners from directly owning property within 50 kilometers of the Mexican coast. Foreigners may purchase and [*12] “use” coastal property through "fideicomisos," a trust arrangement in which a Mexican bank holds title to the property and serves as fiduciary to the buyer. In the context of law and development theory, “fideicomisos” should be sufficient for significant development as they create well defined and transferable contract rights, held for 50 years and renewable and enforceable in Mexican courts. However, “fideicomisos” are seen as creating such uncertain property rights that they have artificially depressed real estate sales on Mexico’s coast and a constitutional amendment to permit foreigners to directly own coastal property is now before state legislatures. Stein’s book would have been theoretically richer if it had compared these two, or other, “exceptional cases” – the failed but relatively more certain “fideicomisos” system in Mexico, and the exploding but relatively more uncertain land use right system in China.
This shortcoming is a quibble, and does not detract from the solid usefulness of Stein’s descriptive project. While saying China’s real estate market is “exploding” or “exciting” is nothing new, pulling back the wizard’s curtain to detail the mechanics is, particularly in the rich detail Stein is able to achieve. If indeed law can be in action, this book demonstrated that it certainly is so in China’s real estate market.
© Copyright by the author, Melissa L. English.