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developer (seller) sells to the public the housing to be built or already built and transfer the title of the housing to the buyer who pays for the housing.64

However, under the Law of Urban Real Estate Management of China, which was adopted on June 5, 1994, when real estate is transferred or mortgaged, the title of the housing and the right to the use of the land to which the housing is affixed shall be simultaneously transferred or mortgaged.65 Thus, is seems that the Supreme People’s Court has actually expended the application of the Contract Law to the transfer of land use right when such transfer is associated with the transfer of the affixture to the land.

2. Contract and Socialist Market Economy

Once again, after 1949 until 1978, China’s economy was known as highly centralized planned economy. Such planned economy was established on the model of former Soviet Union, and developed during China’s first five-year plan period (1953–1958). The most notorious features of the planned economy were the mandate of state plan and the dominance of public ownership (state and collective ownership), and as a result, no private ownership or property existed or was allowed to exist.66 As we have discussed, under the planned economy, the state became the economic player and the state plan virtually controlled all business transactions. Though occasionally, the state owned enterprises were asked to deal with each other through an agreement, such agreement was nothing but the tool to implement the state plan, and the parties to the agreement barely had any choices of their own. Therefore, the state plan in fact had made it totally meaningless to have any contract.67

In 1978, awaken from the edge of bankruptcy of the nation, Chinese government started to explore the new direction that could help revive the country’s economy. The boldest step was the adoption of the policy of “economic reform and opening-up to the outside”. The economic reform was intended

64See id. art. 1.

65See, Law of Urban Real Estate Management of China, art. 31, effective on January 1, 1995, available at http://www.law-lib.com.cn/law/law_view.asp?id=253.

66In mid 1950s, China launched a national campaign to “transform private ownership into socialist one”. Aimed at extinguishing all “capitalist elements”, this nationwide “socialist transformation” helped establish the absolute control of public ownership over the economy. By the end of the first five-year plan (1958), the state owned enterprises amounted to about 80% of the national economy. See Wu Jinglian, A Road to the Market Economy, 129 (Beijing University of Industry Press) (1992).

67See Zhang Guangxing, General Introduction to the Law of Obligations, 14 (Law Press) (1997).

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and purposed to establish a new economic system and to build a modern enterprise scheme. But at the heart, the economic reform essentially dealt with three things: “socialist system”, “private ownership”, and “market economy”. In this connection, there were three questions that puzzled everyone at the outset of the economic reform:

a.Was the private ownership necessarily contradictory to the socialist system to which China sticks? In other words, could the socialist system embrace private ownership, in addition to public one?

b.Did the market economy have to be established on the private ownership economy, or could it be adopted in a pubic-ownership-based socialist system? And

c.Could both public and private ownership co-exist in a market economy with the public ownership as the core?

Apparently, there was no immediate answer to these questions. However, driven by the urgent need for making the country prosperous, Chinese government followed Mr. Deng Xiaoping’s famous philosophy of “walking across a river by touching the stones underneath” and cautiously moved forward. Interestingly, during the process of the economic reform in the past two decades, China’s economy system was redefined from “socialist planned economy” to “socialist planned commodity economy” in 1984, and then to “socialist commodity economy” in 1987, and finally to “socialist market economy” in 1992. One year later in 1993, the “socialist market economy” was formally adopted as a basic economic system of the nation in the Chinese Constitution through an amendment. This was not simply the change of term, but this typically reflected the change in the country’s economic system and the change in ideology of the nation.

With regard to recognition of the private ownership in China, it can be best explained by looking at the changes in the Chinese Constitution. There have been four Constitutions in Chin since 1954, and current one is the Constitution that was adopted in 1982.68 Prior to 1982, private ownership had long been deemed as something that the socialist system must get rid of. The 1982 Constitution, at the time it was adopted, did not explicitly recognize the private ownership as well, though Article 11 of the Constitution stated to protect the lawful interest of “ urban and rural worker’s individual business”.

On April 12, 1988, Article 11 was amended to clearly provide that the State permits the private sector of economy to exist and develop within the limit

68The four Constitutions were adopted in 1954, 1975, 1978, and 1982 respectively. The 1982 Constitution was amended four times in 1988, 1993, 1999 and 2004 respectively.

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prescribed by law, and that the private sector of economy is a complement to the socialist public economy.69 Eleven years later, on March 15, 1999, Article 11 was amended again. It now provides that the non-public sectors of the economy such as individual or private sectors of the economy, operating within the limit prescribed by law, constitute an important component of the socialist market economy.70

Since the 1982 Constitution was amended in 1993, China has been committed to the practice known as “socialist market economy”.71 As an important gesture of implementing the socialist market economy, the 1993 Amendment changed “State-run enterprises” to “State-own enterprises”. Though the term “socialist market economy” was never well defined, it clearly reflected the ideological thinking of Chinese communist government: On the one hand, the country must stay with the socialism where the public ownership (or state ownership) remains as dominant force; And on the other hand, in order to make the country strong, its economic development shall be driven more by market force than by the government plans of administrative nature.

There was a belief in China that the market economy might also serve the socialist need because in its development, the market economy, though originated in free enterprise system, in deed took different forms.72 Therefore, since the concept of “socialist market economy” emerged in China in 1980s, there has been an attempt to find the “equilibrium” between socialism and market economy.73 In the meantime, in order to abandon the planned economy that existed in China for decades, Chinese government repositioned China as the

69See 1988 Amendments to the Chinese Constitution.

70See 1999 Amendments.

71Prior to 1993, Article 15 of the Chinese Constitution provided: “the State practices planned economy on the basis of socialist public ownership. The State ensures the proportionate and coordinated growth of the national economy through synchronized balance of economic plans and the supplemental role of the market force”. The 1993 Amendments changed this article into the following: “The State practices the socialist market economy. The State strengthens economic legislation and improves macro regulation and control”.

72Chinese scholars divide the market economy of the world into different models. The major ones are US Model – free market economy, French Model – administrative market economy, and German Model – social market economy. See Liu shiming, Market Economy Models in the Modern World, 648–649 (Guangdong Tourism Press, 1998).

73In November 1979, when Deng Xiaoping introduced his idea that “socialism may also practice market economy”, the term “market economy” – used to be a taboo in China, was first associated with the term “socialism”. In October 1982, Deng Xiaoping again pointed out that there existed no fundamental contradiction between socialism and market economy. Then during his famous tour to the south in 1992, Mr. Deng further emphasized that market economy was not the line that differentiates socialism and capitalism. See Ding Bangkai, the Law of Socialist Market Economy, 6 (South East University Press, 2002).

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country that is and will long be in the “preliminary stage of socialism” where market remains the primary force of the economy.74

In March 2004, China for the fourth time amended its 22 years old Constitution.75 The 2004 Amendment that contain 14 articles is said to have made substantial changes to the Constitution, and one of the most spectaculars changes is perhaps the bold move toward more protection of private ownership in China.76 Three articles in the 2004 Amendment reflect such move. The first one is the requirement of “compensation” when the State expropriates or requisitions land or private property of citizen for public interest. The second one is the adoption of term of “non-publicly-owned economy” to include individual and private economies. And the third one is the explicit statement that the lawful private property of citizen shall be inviolable.

A new development concerning China’s current economic structure is that after joining the WTO in 2001, the country has been making efforts to promote its “market economy” status and to have the status recognized by other countries. The purpose is to try to best utilize all benefits the WTO that is structured on the market economy may provide. In April 2004, New Zealand became the first county that recognized China’s market economy status. By May 2005, some 38 countries, including Russia and 11 European countries, had announced their recognition of the market economy status of China.77

However, it is important to keep in mind that the market economy, or more precisely the socialist market economy, at least for the time being, is not purposed to turn China into a private-ownership-premised country, nor is it intended to eliminate the state plan. According to many Chinese scholars, socialist market economy could be characterized to include three distinctions: (1) the pillar of the socialist market economy is public ownership though the public ownership

74When 1982 Constitution was amended in 1993, a new paragraph was added into the Preamble of Constitution. It is provided that our country is now in the preliminary stage of the socialism, the fundamental task of the nation is to put-together all sources to carry-on the construction of the nation’s modernization in accordance with the theory of building socialism embedding Chinese characteristics.

75The 2004 Amendment was adopted the National People’s Congress on March 14, 2004 with 2,863 votes in favor, 10 against and 17 abstentions. The passage of the 2004 Amendment was acclaimed by Chinese Communist Party as the triumph of constitutional legislation in China.

76Another change that has received the world attention is Article 24 of the Chinese Constitution. Article 24 essentially makes it constitutional mandate that the State respect and protect human rights. It is the first time that the human rights protection is included in Chinese Constitution.

77After Iceland and China signed in May 2005 a Memorandum on Strengthening the Corporation in Economy and Trade between China and Iceland where Iceland announced to recognize China as having market economy, the number of countries that have recognized China’s market economy status reached 38. For more information, see http://www.mofcom.gov.cn/aarticle/zhongyts/x/200501/20050100327818.htm.