On 30 June 2022, purchasers of Hengda Longting apartments in Jingdezhen City, Jiangxi Province, issued a public notification of intending to stop paying home loans (qiangzhi tingdai gaozhi shu). The notification represented over 900 purchasers of the apartments. It disclosed that building work had stopped since 1^st June and construction workers had been paid only twice in 2022; it demanded that construction work be fully resumed by 20 October, otherwise home loan payments would be stopped until when construction work resumed.

Remarkably, but understandably, the notification was addressed to the Jingdezhen City government, the local Urban and Rural Residential Housing Construction Bureau, the local bureau of the China Banking Regulatory Commission, and all banks that have provided loans. The notification was quickly followed by many other similar ones all around the country. Within two weeks, notifications issued by purchaser groups against 101 building projects in 47 cities were recorded. This phenomenon was dubbed the “stop-paying-the-loans wave” (ting dai chao).

The fast spread of the purchasers’ actions is a reaction to systemic problems in China’s residential housing mortgages and, more widely, in land and housing developments.

In China, purchasing an apartment from a developer usually means purchasing off-plan (advance sale). Article 45 of China’s Urban Real Estate Administration Law 1994 prescribes that advance sales can commence after property developers have paid the full price for the land, obtained relevant licences for the construction, invested at least 25% of the total budget on the construction and obtained a licence for the advance sale; the funds from the sales must be used in the construction of the relevant project.

In practice, at the time of signing the sale and purchase agreement, purchasers pay a deposit from their own pocket and take out loans to make up the full price. The loan money is not paid to purchaser nor the developer at the time of purchase. Instead the bank retains the money, and releases the fund to the developer in stages.

The risk for purchasers is that they have incurred liabilities for the loan before they take title or possession of the apartment. To address that risk, the Measures of the Management of Advance Sale of Urban Housing 1994 (amended in 2004), issued by the Ministry of Construction, provides that rules on the supervision of the use of the sales fund shall be made by the real estate administration department. No such rules have been made at the national level; instead local regulations fill the gap. For example, the Advance Sales of Housing Regulations of the Guangdong Province (2000) require a special account be set up for the sales fund, the receipt and use of the fund be supervised by the real estate transaction registration bodies (usually part of the real estate administration department) of the cities or counties where the apartments are located, and that the banks release the funds according to the approval of the registration bodies (arts 30, 32 and 33). Other provinces adopt a similar model.

The trouble is that often the funds are released when the developers have not completed the required level of construction and, once released, the developers often use the funds in other projects or to acquire more land. The usual problem in China that there is a law but the law is not complied with occurs in this context.

The Supreme People’s Court (the SPC) made an interpretation in 2003 which provides that if a sales agreement is cancelled, the purchaser can accordingly cancel the loan agreement and the developer is responsible for repaying the purchasers’ purchase price and interest (Interpretation on Relevant Issues concerning the Application of Law in Trying Housing Sales and Purchase Agreement Disputes). Furthermore, in a 2020 decision, where the sales agreement and the loan agreement had been cancelled, the SPC held that the purchasers were not responsible for repaying the outstanding amount of released funds to the bank, instead the developer was. This protects the purchasers from further liability; however if the developer is bankrupt, the purchasers will have no means of recovering their deposits or the money that they have repaid to the bank.

Some lawyers in China have opined that the sales agreement and the loan agreement are two different contracts, and before the loan agreement is cancelled according to the law, purchasers continue to be liable for the loans. This opinion is misconceived. The money held by the banks belong to the purchasers, who have been paying interest on it. The banks, having the responsibility to look after the purchasers’ money, owe a fiduciary duty to the purchasers to ensure the security of the funds. When the banks (and the supervising government agencies) breach that fiduciary duty, the purchasers not only have the right to stop the repayment, but also should have the right to recover their loss from the banks and the government agencies.

Overall the design of the law is problematic. The banks receive interest for the full amount of loan but continue to have control (and likely the use) of the money; in contrast purchasers have neither control nor use of the money which in law is theirs. Further, the more the regulations require supervision and approval, the more they provide power for those in the position of supervision and approval, and the more opportunities for corruption. A law stipulating the civil liabilities, rather than simply administrative penalties, of the supervising bodies and the banks would better serve the public and reduce the recurrence of the problem.

When the law is ineffective or insufficient in protecting the public interest, and if the public do not have a legal recourse, the result could be violent disruption or destruction to the existing social framework. The government has taken its usual approach of erasing information about the “stop-paying-the-loans” movement from public forums, but the anger and desperation of many ordinary people who have lost their life savings will not be easily supressed if their interests continue to be ignored. The likely cause of action, as is usually taken by the local governments, is to mediate between the relevant parties, adopting the administrative method rather than judicial procedure to resolve disputes. As the legal procedure has not been preferred, it is doubtful that a wholesale reform of the law or improvement of its implementation will be made soon.