A Critical Weakness

Tuesday, July 1, 2008

In ancient China, it was said that “all land under heaven belongs to the emperor, and all people on the earth are the subjects of the emperor.” For more than 2,000 years, no tradition of laws or contracts existed for individuals in China. Property rights in China are poorly defined even today, which is why the nation has an underdeveloped, inefficient market economy known for corruption, abuse of power, and an expanding gap between the rich and the poor.

A society must have unambiguous, secure, and alienable property rights if it hopes to promote a market economy. Economist Yoram Barzel explains that property rights define effort and ownership so as to protect an individual’s property. Other members of society must recognize, honor, and approve of these rights. The core of Roman law defined property rights principles, which safeguarded sacred individual rights.

In China, no civil law came into force until the republican era in the 1920s, nor was there any national awareness of the need to respect the rights of others. When the People’s Republic of China was founded in 1949, the communist leaders adopted a Soviet model by which to allocate social resources. No private person could claim a right to any immovable property. Land ownership in the People’s Republic of China was divided as follows: urban land belonged to the state, and rural land was owned by the collective. Moreover, there were no incentives to work hard, save, invest, or manage resources.

Over the years, China’s central planning developed serious problems, bringing the economy to the brink of collapse in the 1970s. After the reforms of 1978, however, China began dismantling its planned economy and building a “socialist market economy.”

The government today acknowledges more than twenty 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 constitution; it was subsequently amended so that Article 11 of the 1999 constitution reads: “Individual, private and other nonpublic economies that exist within the limits prescribed by law are major components of the socialist market economy.” The constitution amended in 2004 was even clearer: citizens could legally obtain private property, and that right must not be violated; if private property is expropriated, the government must provide compensation. Policy makers and academics now realize that without clear property rights, a market economy cannot prosper.

IN PRACTICE, PROPERTY R IGHTS ARE MURKY

But obscurity and confusion persist. State-owned enterprises (SOE), for example, are a particular drain on China’s economy. Who owns an SOE— is it the State Council, an agency, or the local government? Under the law, the State Council enforces the ownership of all state assets on behalf of the state, whereas central and local authorities “manage” those assets at their various levels. The managers, having asymmetric rights and responsibilities, are not responsible for their performance. Moreover, the obscure nature of property rights results in inefficient use of resources and staggering losses of state assets.

Under the economic reforms, most state-owned enterprises have been restructured to become stockholding companies. But their equity is largely in the hands of the state, meaning that the state is now the largest shareholder, giving it new opportunities to misuse the assets of nonstate medium and small shareholders. The largest shareholder has no ultimate beneficiary and no person responsible for managing its property rights. The various state agencies are “agents,” rather than owners, of state assets. Moreover, those who manage SOE assets are selected and appointed by the government, rather than through competition; thus they are beholden to the government rather than to the interests of the nonstate shareholders.

Farmland in rural areas is owned collectively by townships, villages, and other groups. An individual farmer does not own the land he or she uses. In practice, collective ownership is managed by a committee elected by villagers; this committee, playing a dual role as an agent of local government and an agent of real property rights, contracts land to the farmers. But this abstract “collective,” like the state-owned shares of a business, fails to identify the representative and enforcer of property rights. Moreover, the state imposes strict rules on land ownership, forbidding transfers, mortgages, or leases.

State-owned enterprises (SOE) are a particular drain on China’s economy. Who owns an SOE—is it the State Council, an agency, or the local government?

As Chinese economist Zhou Qiren points out, the only way to improve agricultural efficiency and increase farmers’ income is to clarify the property rights: who can use the land, cultivate it, buy and sell farm products, trade or transfer the land to others to maximize resources and divide labor, and so on. If the farmers were to own the land fully, they would cherish it, tend it meticulously, make long-term investments, and pursue maximum profit in the market. Only thus could China transform land from a mere means of agricultural production to a capital asset, which could be traded in the market for its maximum value.

A NEW, COMPREHENSIVE LAW ON PROPERTY

In 1998, the Standing Committee of the National People’s Congress (NPC) decided to take steps toward a property law. A first draft, completed in 2000, was opened for comments and public hearings and set off great controversy. Many in the Chinese legal community feared that the proposed law would make it easier to privatize, thus stripping the assets from stateowned enterprises and legitimizing assets that had been acquired illegally. Others argued that the law would undermine the socialist principle of state ownership. The draft was 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 revisions and additions to address the above concerns, was formally passed in the 2007 session and took effect October 1, 2007.

The property law is meant to be comprehensive. It contains five sections: general principles, ownership, usufructuary rights (that is, the rights of a trustee who enjoys income from property held in trust), right of security, and possession. Although it is far from perfect and leaves many questions unanswered, this law is the first serious attempt by the Chinese government to manage and clarify property rights.

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

The new law requires a uniform registration system for immovable property. According to Article 9, the creation, alteration, alienation, or termination of rights to an immovable asset shall not become effective until it is registered. It also simplifies the procedures for registering immovable property and reduces the power of administrative organs in the process.

If Chinese farmers were to enjoy full ownership of the land, they would cherish it, tend it meticulously, make long-term investments, and pursue maximum profit in the market.

But again, because all land belongs to either the state or the collective, no private ownership of real estate exists in China. Individuals do, however, have land-use rights: rights to the contracted management of the land, to build, and to use housing. The user may possess, use, and receive benefits from the land but may not dispose of it or sell it. Before the property law passed, the right to use land was on a term basis. For example, people living in cities could buy and “own” houses, condominiums, or apartments for only seventy years (it was unclear what the owner could do with the property after that period). The new property law specifies that the right to use residential land “shall be renewed automatically” when the term expires. The owner can thus 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 holders of the expropriated properties are to be fully compensated.

UNRESOLVED PROPERTY RIGHTS ISSUES

The new property law is perhaps the most important step in the drafting of the Chinese civil code since the People’s Republic of China was founded. Nevertheless, as economists and legal experts point out, it leaves many problems unresolved. Who represents the “state” or the “entire people,” for example, when exercising the ownership of state assets? What is the nature of those enterprises in which the state still invests?

Questions about collective property also persist. Under the new law, collective land is still not transferable. Can farmers’ homesteads be transferred freely, and can the contracted rights of collective land be reinvested and mortgaged? The status of the farmer’s house is also ambiguous: according to the law, farmers are entitled to build houses on the land they work, but when they sell those houses to outside buyers, no title certificates will be issued. At the same time, village and township officials can easily transfer collective-owned land to urban developers without farmers’ consent, for the law lets local authorities requisition certain collective-owned land for the “public interest.” It is not clear, however, who has the authority to expropriate it: the central government, the ministries, the local authorities, or another agency? The law sets no standards for a fair and just process. Nor are “public purpose” and “public interest” clearly defined. The door is still open for local officials to pursue their selfish interests.

Moreover, the displaced farmers are supposed to be reasonably compensated, but in practice that compensation is unbelievably low, failing to cover the relocation cost and living expenses of the farmer whose land was taken. Compensation battles have broken out between local authorities and forced-out residents unsatisfied with their compensation. Government studies indicate that land has been confiscated from more than 50 million farmers, often by corrupt officials working in concert with developers. Such illegal takings have caused frequent mass demonstrations, petitions, and protests in rural areas. Yet no standard for establishing compensation is provided under the property law.

The new property law specifies that the right to use residential land “shall be renewed automatically” when the term expires. In effect, the owner can thus use the dwelling site almost indefinitely.

Many people are concerned about how the law will be carried out. Scholars point out that the unresolved issues transcend the legal realm and touch on China’s political ideology. China’s government and Communist Party acknowledge the urgency of further clarifying property rights and are expected soon to enact special statutes and regulations to refine them. The passage of the property law shows that China recognizes the universality and necessity of safeguarding individual property rights, thus laying a foundation for equitable market transactions.