The Relationship Between Economics and Law in China

The Relationship between Economics and Law in China

China’s economic, political, and legal systems have drawn much attention in recent decades.  The country’s unique circumstances and qualities make it a rich subject of study.  China’s most remarkable characteristic is its unique ability to achieve unparalleled economic growth with its developing property and contract laws.  

Economics and law affect each other.  The relationship between a country’s economic progress and its legal system is widely researched.  Although the relationship remains a complex subject, there is a strong basic argument that economic stability and progress rely on an effective legal system.  The fields intersect in the areas of contract and property rights. The enforcement of contract law and property law is particularly essential to the transactions necessary to a sophisticated economy:

“[L]aw is necessary to create and maintain a sophisticated market. Without enforceable contract rights, exchange will not be possible beyond the most basic kinds of barter. Without property rights, investment will not occur because investors will not be able to protect their assets from private theft and state expropriation. In both instances, the instrument of rights enforcement is an independent, honest, and competent judiciary. Restated, the thesis is that property rights determine who has control over assets; contract law enables market participants to exchange those assets in complicated transactions; and the courts enable market actors to plan by resolving disputes predictably, efficiently, and in accordance with the legal rules. According to this conception, while legally unenforceable exchange can occur in networks and communities with high levels of trust, complicated transactions among strangers, upon which large-scale growth depends, cannot take place without these elements.”^[1]

The terms of this relationship are no different as applied to the economic and legal system in the People’s Republic of China (“China”).  China’s circumstances, however, are unique.  Since 1949, the Communist Party of China (“CPC”) has enjoyed the monopolistic control of the nation’s legal system.  Consequently, the legal system reflected and continues to reflect the CPC’s ideology.  The CPC’s ideology has historically relied heavily on the Marxist notion of economic determinism.  

Economic determinism attributes primacy to the economic structure over politics in the development of human history.^[2]  “The sum total of [the] relations of production constitutes the economic structure of society, the real basis on which rises a legal and political superstructure and to which correspond definite form of social consciousness.”^[3]  The CPC has, until recently, employed the theory of economic determinism as a means of subverting the rule of law to its own needs in a quest for ideological advancement and purity.

Following the CPC’s successful takeover of power in 1949, it collectivized much of the country’s property.  As a result, the CPC, the vanguard of the Chinese proletariat, took title to the property.  It did not afford individuals substantial private property rights; private property and private business were anathema to the CPC’s ideology.  Moreover, the CPC did not recognize the right to contract, particularly where such contracts were contrary to the regime’s goals.  The free market was seen as an instrument of exploitation that frustrated the purpose of the revolution.

The CPC has, however, backed away from its adherence to the economic determinism model since Deng Xiaoping’s market reforms in 1978.^[4]  These market reforms continue into the present.  Changes in property and contract law have been central to reform and to the country’s economic progress.            

One of the earliest and most fundamental changes to Chinese property law was the 1982 Constitutional guarantee to protect private home ownership.^[5]  The Constitutional provision nevertheless dictates that the state owns all urban land, regardless of who owns the buildings on the land.  The CPC enacted additional measures shortly thereafter:

“Early programs involved city governments setting aside a portion of new housing stock for sale to individuals at artificially low prices. Later programs encouraged residents to purchase the government-owned homes in which they already lived. Private home ownership slowly climbed, but only really took off after the State Council, in 1998, announced an end to new allocations of state housing and made mortgages available to individuals on attractive terms.”^[6]

The compromise allowing private home ownership without rights to the underlying land was designed to encourage real estate transactions and productive real estate investment.  As of 1982, 31% of the country’s urban households were classed as having inadequate floor space.^[7]  The CPC thereafter embarked on a program to sell government housing and new housing stock to private buyers.  It additionally authorized a market in buying, selling, and renting private houses.^[8]  By 1987, the CPC discussed the concept that land should be treated as a commodity and traded on the marketplace.^[9]  In 1998, the CPC made mortgages available on attractive terms.^[10]  This combination of legally enforceable property and contract rights provided a foundation for economic success.  86% of urban residents own their homes by 2004.^[11]  The second half of this paper will elaborate on contract rights.

        Commercial development was an even more impressive consequence of the CPC’s authorization of the sale of the right to use land.  This commercial development came by way of Land Use Rights (“LUR”).  The holder of LURs has the right to use, transfer, lease, mortgage and enjoy an income stream from a designated piece of land specified by a contract with the local land administration department.^[12]  LURs are typically purchased by commercial real estate developers.  Although the local land administration bureau restricts use, its guarantee of property rights to the developer resulted in considerable economic growth.  Real estate growth comprised approximately 20% of China’s gross domestic product increases in 2001 and 2002.^[13]