Public Grant of Land Use Rights and Mortgage Lending Risks

In the event that a winning bidder fails to pay the full amount due, land administrators may revoke the grant and launch another round of bidding, or to simply pick the second highest bidder for the initial round. Holding a second round of bidding has the downside of being burdensome on land administrators who would incur still further costs, and who may not recoup such costs from participants in the bidding. Furthermore, the land administrators may not be able to use the deposit to offset these disadvantages since, as has already been mentioned, no minimum amount for such deposits has been imposed by law. More importantly, regardless of the method used to select the new grantee, the land administrators would have to face the same credit risk again.

Another option is to issue title documents without receiving the full payment on the condition that the title documents be used only as collateral for bank financing. In this way, Public Grantees would be able to obtain financing from banks to pay the outstanding fees and charges owed to the land administrators. Clearly, from the point of view of the land administrator this option is very attractive. Simply put, it poses the least risk and allows for quicker and easier collection of the outstanding payment. Quicker utilization of the land can also be achieved, which is consistent with the regulatory objectives of the whole public grant exercise.

Since the payment obligation of the Public Grantee to the land administrator is of a one-time nature, the land administrator has no reason to worry about the Public Grantee's subsequent cash flow. Furthermore, under the Urban Real Estate Administration Rules which took effect on January 1 1995, a developer who fails to develop the land for which it is granted land use rights faces fines of up to twenty per cent of the grant fee and can even lose the land use rights without receiving any compensation.

However, in the event that the land is used as collateral for loans by the grantee, the burden of risk unquestionably passes to mortgagors or lenders. Recently, there have been press reports that the China Banking Regulatory Commission and its Beijing office have issued warnings to commercial banks to address exactly such types of risks.

An alternative is to abandon the requirement that title documents may only be issued upon receipt of the full payment of the land use right grant fees and other charges. Instead, the total amount of fees due, the amount already paid by the grantee and the amount outstanding, as well as the deadline or schedule of payment should all be prominently marked on the title document. Such a recording system, which would be available for public search, would virtually eliminate concerns of fraud and the integrity of land administrators and would eliminate the propensity to cover up the financial capability of the grantee. In addition, lenders would have the necessary information to evaluate the risk and financial position of the potential borrower.

In conclusion, while the system of Public Grants is undoubtedly an improvement on the previous negotiated deal system, it still has certain shortcomings that detract from the overall efficiency of China's market for land use rights. Legislation addressing such deficiencies would benefit government, business and the public alike.