Chinese Mortgage and Security Law

Chinese security law is governed by Book II (Property) of the Civil Code, which dedicates Articles 386-462 to security interests in property (danbao wuquan, 担保物权). The Civil Code’s security provisions replaced the previous Security Law (1995) and the Property Law’s (2007) mortgage provisions, consolidating and reforming the law of real and personal property security.

Types of Security Interests

The Civil Code recognizes three principal types of security interests: mortgage (diya, 抵押), pledge (zhiya, 质押), and lien (liuzhi quan, 留置权). Each security interest grants the secured creditor the right to be paid from the value of the secured property in priority to unsecured creditors.

The mortgage applies to immovable property and certain movable property without transfer of possession. The pledge applies to movable property and rights (including accounts receivable, negotiable instruments, and intellectual property) with transfer of possession or control. The lien applies to property in the creditor’s possession that the debtor owns, related to the creditor’s claim.

Mortgage (Diya)

The mortgage (diya quan) is the most important security interest in Chinese practice. The Civil Code applies to mortgages of: buildings and other land structures; construction in progress;建设用地使用权 (land use rights); machinery, equipment, and vehicles; raw materials, semi-finished products, and finished products; and other property not prohibited by law.

The mortgage must be created by a written contract specifying the secured debt, the mortgaged property, and the scope of security. The mortgage is valid upon execution of the contract; three-way registration against third parties applies to mortgages of immovable property. Registration gives the mortgage priority over later-registered mortgages and over unsecured creditors.

The mortgagor may continue to use the mortgaged property and may lease it (subject to the mortgage). The mortgagor may not sell or transfer the mortgaged property without the mortgagee’s consent, except where the Civil Code permits sale to a buyer who assumes the mortgage.

Pledge (Zhiya)

The pledge (zhiya quan) applies to movables and rights. A chattel pledge requires delivery of possession of the pledged property to the pledgee or a third party agreed by the parties. A right pledge may be created by: delivery of the instrument (for negotiable instruments); registration with the appropriate authority (for accounts receivable, IP rights, and equity interests); or notice to the obligor (for accounts receivable).

The pledge agreement must be in writing and specify the secured debt, the pledged property, and the scope of security. The pledgee must take reasonable care of the pledged property and must not use or dispose of it without the pledgor’s consent. Upon satisfaction of the secured debt, the pledgee must return the pledged property.

Lien (Liuzhi Quan)

The lien (liuzhi quan) arises by operation of law where the creditor has possession of the debtor’s property related to the creditor’s claim, and the debtor has not performed the obligation when due. The lien applies to: processing and修理 contracts; transportation contracts; warehousing contracts; and other contracts where the creditor’s possession is related to the claim.

The lienholder must return the property when the secured claim is satisfied or otherwise extinguished. The lienholder may not use or dispose of the property without the debtor’s consent. The lienholder has priority to the value of the property over other creditors, including earlier-created security interests.

Registration System

The Civil Code establishes a unified registration system for security interests. The registration system is administered by the State Administration for Market Regulation (for movable property) and the Ministry of Natural Resources (for immovable property). The 2019 Measures for the Registration of Chattel and Right Pledges established a unified online registration system that replaced the previous fragmented registration systems.

Registration is effective upon filing with the relevant authority. The registration system is searchable by the public and provides notice of existing security interests. Priority among competing security interests generally follows the rule of first to register. Unregistered security interests remain valid between the parties but are ineffective against third parties.

Priority Rules

The Civil Code establishes rules for priority among competing security interests. The general rule is: registered security interests rank by order of registration; registered interests take priority over unregistered interests; and a lien arising by operation of law takes priority over voluntarily created security interests.

Special priority rules apply to: purchase money security interests (super-priority for the seller financing the purchase of assets); security interests in accounts receivable (priority to the first to file); and floating charges (priority determined by registration order).

Realization

Realization (shixian danbao wuquan) may be achieved through: agreement between the secured creditor and the debtor; auction or sale in accordance with the Civil Procedure Law; or summary realization procedure in court. The 2020 Civil Code introduced an efficient summary realization procedure that allows secured creditors to apply to the court directly, without filing a full civil action.

The realization process involves: valuation of the property (by agreement or court-appointed appraiser); auction (through the court’s online auction platform or by agreement); distribution of proceeds (first to the costs of realization; then to the secured creditor; and finally to the debtor or other creditors). The debtor is liable for any shortfall after realization.

Shenzhen Hoi Tung Marine v Case

The Shenzhen Hoi Tung Marine v. Defendant (2018) case addressed the priority of ship mortgages under Chinese maritime law. The court held that a ship mortgage registered under the Maritime Code had priority over a later mortgage arising from a contract to build the ship, even though the construction mortgage was registered under the general property law. The case established that the priority of ship mortgages is governed exclusively by the Maritime Code’s registration system.