CHINA'S MOVES TOWARDS granting private property constitutional protection are a useful step forward. Doing so, however, will not end official meddling in the economy, nor in itself stimulate further private sector growth. The main reason for this is the emphasis on ownership. The proposed constitutional amendment, approved by the National People's Congress Standing Committee on the weekend and now only needing to be rubber-stamped by the full NPC when it meets in March, states that 'private property obtained legally shall not be violated'. Symbolically this may be important. It suggests that what anyone owns is in fact theirs, and will not be arbitrarily taken away from them. But it does not take the people who need it most - those attempting to build China's private sector - very far. This is because ownership is only important as part of a far larger structure of rules about what one can or cannot do with things that are owned - for example, how can things be used to make money, or how can they legally be taken from someone and given to someone else. Two recent events showed just how the emphasis on ownership should not be overplayed. First was the failure of Huarong Asset Management's auction of some 25 billion yuan's worth of bad loans. The reason given for the failure was that the prospective buyers - mainly foreign banks - did not have enough information about the loans to know whether they had a chance of making money. The issue was not ownership. The prospective buyers were not worried that they would fail to end up owning what they bought. Instead they were concerned whether they would be able to realise the value of any debts they might have bought. If a financial institution buys a bundle of non-performing loans, it want to know what sort of support - or obstruction - officials and courts are likely to give to attempts to realise value by selling off assets or closing companies. China already has a bankruptcy law - but could it be applied? If a ruling is obtained granting rights to an asset, how can it be enforced, and who will be doing the enforcing? The second event was the signing of a preliminary agreement by China National Blue Star Group, principally a chemicals company, to buy South Korea's fourth largest carmaker, Ssangyong Motor. The agreement drew a swift protest from Shanghai Automotive Industry Corp, which said the government had granted it the exclusive right to bid for the deal. How odd. Shouldn't it be the seller who decides who buys its property? Probably it will in this instance, as Ssanyong does not fall under Beijing's governance. But Shanghai Automotive's instinctive lurch towards official backing for its action underlines how large state-owned companies and the government still believe it is the state that should play a large role in deciding who does what with property - a notion at odds with the market-based system it ostensibly wants to build. As both Huarong's auction and the Ssangyong purchase illustrate, the principle of ownership is of far less importance than the rules surrounding what can be done with property you legally own and how transparently they will be applied. This means that adding provisions on the ownership of property into China's constitution may help private business and entrepreneurship thrive, but far less so than working on the enforceability of contracts and rules. Indeed, the emphasis should not be on the sanctity of property rights but quite the opposite - showing how they can be legally violated. If a loan is not repaid, the lender can come and claim the collateral put up for the deal, or if that is not available, put a company into bankruptcy to recoup as much of its loan as possible. Of course, allowing this would bring much of the state-owned sector down, and with it the banking system. No one wants this to happen. But the price, over the next several years, will be a slower-growing private sector, and with it a less dynamic economy.
