Chinese Small Property: The Co-Evolution of Law and Social Norms

Abstract

This research investigates a market of informal real estate in China, referenced by the term “small property” (xiaochanquan), as their property rights are smaller/weaker than the big/formal property rights. In particular, I examine the formation and operation of this market, and how it interacts with the legal system and eventually leads to changes in the Chinese property law system. Three decades of Chinese land reform has resulted in a liberalized urban real estate market and an unreformed rural real estate sector characterized by inalienability. Nevertheless, according to the Chinese Ministry of Land and Resources, by 2007, Chinese farmers had built over 6.6 billion square meters of houses in evasion of the legal prohibition on rural land development and transfer, resulting in a huge small-property market. By way of comparison, in 2007, the total floor space of housing sold on the legal housing market was 0.76 billion square meters. In the city of Shenzhen, which experienced exponential population growth from 300,000 to over 10 million from 1978-2010 as the first experimental site of China's market reforms, almost half of the buildings are small-property constructions. These illegal buildings, without legal titles and concentrated in 320 intra-city villages, host most of the 8 million migrant workers in Shenzhen and are the main livelihood of the more than 300,000 local villagers. There has formed a huge impersonal small-property market that is supported by a network of institutional innovators, including local villagers and their co-ops, local government officials, real estate developers and brokers, lawyers, etc. Both the risks of contract breach and of government demolition are greatly reduced because of the implicit consensus on rural land development and transfer. However, as land available for development decreases, the Shenzhen city government has adopted various policies on small property, ranging from legal enforcement of the prohibition to legalization. These varying and changing policies, together with the tensions and conflicts within the Chinese legal system, have led to different interpretations and applications across time and in different villages, resulting in the diverging destinies of small property. This case study endeavors to explore the co-evolution of property law and norms in the Chinese market transition. First, it finds that property norms changed more swiftly than property law and served as imperfect institutional infrastructure for a market economy at the beginning of the Chinese market transition. Property norms, as examined in this research, are norms of “intermediate-knit groups,” which consist of a core network of institutional and market entrepreneurs, and extends to millions of unacquainted and unrelated sellers and buyers. Second, it discloses a more dynamic interaction between law and social norms in China. In particular, it explores how a layered and fragmented legal system leaves room for the growth of property norms, and how the ad hoc legal responses to the deviating property norms lead to changes in both the property norms and property law itself. What connects law and social norms are the institutional entrepreneurs who play different roles in different systems simultaneously in accordance with the identity they assume within each system. From the perspective of institutional actors, law and social norms are endogenous to and integrated with each other, rather than exogenous to or separate from each other. Overall it presents a story about the evolution of property rights with consideration of political, economic and communal factors combined, as opposed to the existing case studies that focus on only one of the above three aspects.