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.