Positive Changes In Chinese Property Law

by: Richard Shaw

The large global law firm Linklaters published a summary of property law changes in China that go into effect October 1st. Linklaters says this is one of the most significant pieces of property rights legislation for China in years.

The new law covers ownership rights, “usufructary” rights, and security rights in “immovable” and “movable” property.

Linklaters says,

It allows new forms of security to be created, broadens the scope of properties which can be used as security and simplifies procedures for realizing security interests. These, in turn, widen the means of financing, better satisfy the financing needs of small and medium enterprises and further protect the realization of secured rights of secured creditors.

The Property Law is significant in taking the reform of China’s economic system to the next level and protecting property rights.

It marks a big step forward in China’s legal and economic development.

You can read the full analysis at the Linklaters site.

Any change that improves the ability of property owners to be more confident in the perfection of title transfer, to effectively lien property used as collateral and to enter into easements (an example of "usufructary" rights) will tend to increase foreign direct investment flows to China.

The new law provides a positive for global giants found in indices such as the S&P 500 (proxies, (NYSEARCA:SPY) and (NYSEARCA:IVV)), and MSCI EAFE (proxies (NYSEARCA:EFA) and (NYSEARCA:VEA)) that need or want to own plant and equipment in China. It will also help certain large companies from some emerging countries, such as S. Korea (proxy (NYSEARCA:EWK)).

The positive changes will probably be reflected over time in China stocks too (proxies (NYSEARCA:FXI), (NASDAQ:PGJ), (NYSE:CHN), (NYSE:CAF), (NYSE:GCH)).

Real estate will be the first to benefit, but foreign industrial companies will have marginally increased confidence and make marginally increased direct investments in property.

The new law is also indicative of the continuing evolution of the Chinese market from an emerging market toward a developed market — developed markets having equitable laws concerning ownership of property and securities, among other things.

We wouldn’t go out and buy any particular stock because of the new law, but the risks of doing business in China will decline somewhat as a result of this change.