Chinese Law Prof Blog

Editor: Donald C. Clarke
George Washington University Law School

Tuesday, December 27, 2005

New Supreme People's Court rules on residential secured lending

The Supreme People's Court made another foray into the field of residential secured lending last month with the issuance of the Rules on Implementation [of Judgments] Against Real Property Subject to a Security Interest (最高人民法院关于人民法院执行设定抵押的房屋的规定) (effective Dec. 21, 2005) (the "2005 Rules"). The 2005 Rules, which provide that secured residential lenders won't have the rights they thought they had under the Security Law, are a modification - in lenders' favor - of another set of rules issued last year, the Rules of Sealing, Seizure, and Freezing in the Course of Implementation [of Judgments] by People's Courts (最高人民法院关于人民法院民事执行中查封、扣押、冻结财产的规定) (issued Nov. 4, 2004, effective Jan. 1, 2005) (the "2004 Rules").

Art. 6 of the 2004 Rules, by providing that courts could not execute against the "necessary" residence of a judgment debtor ("对被执行人及其所扶养家属生活所必需的居住房屋,人民法院可以查封,但不得拍卖、变卖或者抵债"), may not have actually abolished secured residential lending, but certainly made it a lot more risky and expensive for banks.

In any case, possibly in response to political pressures (although I have no idea what in fact was behind it), last month the SPC issued another set of rules that give a little bit back to lenders. Article 1 of the 2005 Rules, in permitting execution against residential property subject to a security interest, explicitly reverses Article 6 of the 2004 Rules. The 2005 Rules go on, however, to establish some conditions for execution, such that in some cases the holder of the security interest will not in the end be able to take the property.

First, the judgment creditor has to give the debtor six months to move out. If the debtor cannot find a place to move to, then upon confirming this, the court may require the creditor to find a place for the debtor. The 2005 Rules explicitly state, however, that the new place need not match the conditions of the old place, and the debtor shall have to pay rent to the creditor (in an amount to be determined by the court with reference to market conditions if the parties cannot agree on the amount). Moreover, the creditor can add to the amount it takes from the sale of the property any rent payments owing at the time of the sale.

Second, where the debtor is a "minimum guarantee" (低保) household and is unable to find a place to move, then the court may not execute against the residence at all. ("Minimum guarantee" households are urban households that have, upon application, been found to have below a certain minimum per capita income and are thus eligible for certain welfare benefits. In Shanghai, for example, the per capita minimum is 290 yuan/month; in Taiyuan it is 181 and in Shenzhen it is 344.)

Whether such frequent and sweeping modifications to the rights of lenders under the Security Law are a good idea as a matter of policy is something we can debate, but whether the Supreme People's Court is the right institution to be undertaking it is a much harder argument to make. Clearly they are trying to give something to the poorest households, but if Chinese banks act rationally in their lending practices (an open question, I concede), the result will be to make credit less accessible to those households. Hernando de Soto has argued that one of the things that keeps the poor poor in the Third World (do people still use that term?) is the lack of institutions allowing them to gain access to credit through loans secured by their property; secured lending turns a house that has value only as a place to live into something that can generate cash as well.

In the end, I think, it goes back to politics. Since the government cannot claim certain kinds of justifications for its existence (for example, election through a democratic process), it must seek justification in other ways - for example, "stability." The result is that the poor who would be able to repay their secured loans, and would benefit from them, are hurt in order to prevent disruptive protests by the poor who would not.

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Prof. Clarke, I like your blog. Your Chinese is terrific! It's interesting that you study the Chinese law from an American perspective. As a Chinese law student, I appreciate your concern for the poor people in China and their opportunities to improve their condition.

First of all, as a matter of fact, the so-called "minimum guarantee" households in China can hardly get loans from the banks. Chinese banks are doing business more rationally and with more discreet than before. That's why the "minimum guarantees" are inaccessible to loans. The issuance of the 2005 rule has hardly any influence on the preexisting reality.

Secondly, how many "minimum guarantees" do you think own real property? The majority of real property owners in China buy their real property after the reform when individuals are allowed to gain ownership (所有权)over their houses and the right to use (使用权) over the respective land (the ownership of the land is kept by the state). Considering no more than 20 years have passed, it is reasonable to believe that those who can afford to buy the real property aren't likely to turn into "minimum guarantee" during a few years? In fact, the majority of "minimum guarantee" households are living in houses that are rented by the government or their prior employer (SOE) before they became laid off(下岗).

By the way, the rule issued by SPC is a kind of Judicial Interpretation (司法解释), which is thought to be quasi-legislation in China. The JIs are (supplementary) source of law (法律渊源). The phenomenon is quite unique. It is true that the JIs are not enacted by the Congress, thus, lacking the authorization from the people.

However, how do you compare it with the judge-made law in common law jurisdictoins such as the United States, Prof. Clarke?

Posted by: Wang | Dec 28, 2005 6:43:05 AM

As the above comment correctly points out, the impact of this interpretation on the poorest is more theoretical than real, something I should have noted. However, the impact of this "protection" on those who do actually want a secured residential loan is still real, since anything that makes it more difficult for lenders to foreclose makes loans more expensive.

As for the comparison with judicial legislation in common-law jurisdictions, I have an observation and a value judgment.

The observation is that it's interesting that in China, where courts are not supposed to engage in legislation, the Supreme People's Court does so quite openly, promulgating lengthy sets of rules unconnected to particular cases. In common law jurisdictions, on the other hand, where it's accepted that precedents will have the force of law until overturned, judicial legislation is generally much more cautious, with courts generally trying to find the least expansive principle necessary to decide the case.

The value judgment is that the SPC probably doesn't do legislation (particularly in economic matters) as well as common-law courts at a similar level, and thus should be particularly cautious about expansive forays into this area. There are two reasons for thinking this. First, the SPC judges are far less likely to have any actual experience in or knowledge of business and economics. Second, because the SPC's rulemaking does not take place in the context of specific cases, it does not benefit from adversarial argument and may be much broader than necessary to solve the particular problem it is trying to address.

This is not a claim that common-law courts always get it right; they are not immune from the temptation to "interpret" a clearly stated rule out of existence in order to do what seems to be justice in a particular case.

Posted by: Don Clarke | Dec 28, 2005 8:25:24 AM

Professor Clarke, you responded so quickly! Thank you for your comparison.
I agree with you that "the court should be particularly cautious about expansive forays into this area. "
I also agree with your first point. But with regard to your second point, according to my experience at the SPC as an intern clerk, although "rulemaking does not take place in the context of specific cases", some (not all) of the rules are summarized in response to issues in specific cases reported to the SPC from lower courts. (Of course, some others are conjured up or drawn from the experience of other jurisdictions)
Chinese laws enacted by the Congress are more often than not, too vague to be applied. Judges at the lower courts, especially those who haven't been academically educated find it difficult to apply the laws. Perhaps that's one reason why the "Judicial Interpretations" are popular in China.

It's very interesting that recently the National People's Congress announced the procedure《司法解释备案审查工作程序》(more detailed and more applicable than before) to test the constitutionality of the JIs and to annul the JIs that contravene laws. Some scholars of constitutional law regard this as the first step leading to a "constitutional review" mechanism.

Posted by: Wang | Dec 28, 2005 9:08:41 AM

Prof. Clarke

We find that there are very few areas where "judicial interpretations" that end up 'promulgating lengthy sets of rules unconnected to particular cases' are not only applied at higher or lower levels of trials -- but more strikingly -- they are so well known that it is often possible to predict what the written opinions will say.

So, on the one hand the Courts are not supposed to engage in legislation and on the other, they do so in such a consistent and regular manner that litigators can often reliably guess, before the written opinion is issued, what the end result will be.

Posted by: Michael Sylvester | Jan 8, 2006 4:00:41 PM

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