Enforcing Mortgages, Pledges and Guarantees in China

A lender who takes "security" in China without understanding how security is actually created often discovers, at the enforcement stage, that it holds nothing enforceable. The Civil Code splits the rules cleanly: some interests arise only on registration, some only on delivery, and a guarantee defaults to a weaker form unless you say otherwise. Getting the creation step right is what determines whether the enforcement step — which itself has a fast track worth knowing — ever happens.

Mortgages: registration, not signature

For real property, registration is constitutive. A mortgage over buildings and their attached structures, land-use rights, sea-area use rights or buildings under construction is established only when the mortgage is registered (Civil Code, Article 402) — signing a mortgage contract without registration gives you a claim against the mortgagor, not a security right in the property. By contrast, a mortgage over movable property is established when the mortgage contract takes effect, but without registration it cannot be asserted against a good-faith third party (Article 403). In practice, the movable-mortgage rule means an unregistered equipment mortgage can be defeated by a later buyer or secured creditor, so registration is treated as mandatory even where the law does not strictly require it for creation.

Pledges: delivery and registration by asset type

Pledges follow a different trigger. A pledge of movable property is established on delivery of the pledged property by the pledgor (Article 429) — no delivery, no pledge, however detailed the contract. For rights, the rule depends on whether there is a certificate: a pledge of instruments, bonds, deposit certificates, warehouse receipts or bills of lading is established on delivery of the certificate, and where there is no certificate, on registration of the pledge (Article 441). Pledges of fund shares and equity (Article 443), of the property rights in intellectual property (Article 444) and of accounts receivable (Article 445) are all established on registration. Each asset class has its own register and its own registration authority, and a pledge registered in the wrong place may be ineffective.

Guarantees: the default is now the weak one

The single most important change from the old regime is the default form of a guarantee. Where the parties have not agreed, or have agreed unclearly, whether a guarantee is a joint-and-several guarantee (连带责任保证), it is treated as a general guarantee (一般保证) (Article 686) — the reverse of the position under the repealed Guarantee Law. That matters because a general guarantor has the defence of prior recourse: the creditor must first sue the debtor and exhaust execution against the debtor's assets before turning to the guarantor (Article 687). A creditor who wants to go straight at the guarantor must say "joint and several" in express terms. Two further default rules complete the picture: the guarantee period defaults to six months from the expiry of the principal obligation's performance period, and it does not suspend, interrupt or extend (Article 692); and a creditor under a general guarantee who fails to sue or arbitrate against the debtor within that period releases the guarantor (Article 693).

Realising security: agreement first, then the fast procedure

When enforcement is due, a mortgagee may first agree with the mortgagor to have the property valued and set off against the debt, or sold by auction or private sale, with priority of payment from the proceeds; if they cannot agree, the mortgagee may ask the people's court to auction or sell the property (Article 410). A pledgee has the corresponding right to agree on valuation or sale and to be paid with priority from the proceeds (Article 436). Where agreement fails, China offers a faster judicial route than an ordinary lawsuit: the special procedure for realising security interests. Under the Civil Procedure Law (Articles 203 and 204), a security-interest holder and other entitled persons may apply to the basic people's court at the place of the secured property or where the security interest was registered, and the court, after examination, rules that the property be auctioned or sold — a ruling that can be executed directly. If the court finds a substantive dispute, it dismisses the application, leaving the ordinary action or arbitration. The special procedure is non-contentious, generally decided within about 30 days, and free of jurisdiction-objection games — which is why a cleanly created, properly registered security interest is worth so much.

Cross-border creditors: registration, foreign exchange, practice

The Civil Code does not restrict security interests by nationality: a foreign lender can be a mortgagee, pledgee or guarantee creditor. The frictions are practical. First, registration offices and systems accept the creditor's identifying particulars, so a foreign entity should confirm in advance what its identity documents must look like for the relevant register — and whether a restricted sector or real-estate transaction imposes its own rules. Second, cross-border security involves foreign-exchange administration: the 2014 Provisions on the Administration of Cross-border Guarantees (State Administration of Foreign Exchange document Hui Fa [2014] No. 29) distinguishes outbound security for onshore debts and inbound security for offshore debts, with registration requirements that can affect the cross-border movement of funds when the security is enforced. Unregistered security can still be created, but enforcement proceeds may not be freely repatriated. Third, enforcement routes — agreement, the special procedure, or an ordinary action or arbitration — are the same for a foreign creditor, with jurisdiction, service and recognition questions handled under the Civil Procedure Law's foreign-related provisions and the relevant treaties. Our dispute resolution practice handles the full cycle, and the related notes on asset preservation and interim measures in China and enforcing foreign arbitral awards in China cover the neighbouring stages.

The pattern to remember is short: register what the law says must be registered, take delivery of what the law says must be delivered, and never leave a guarantee in the default general form if you want direct recourse. Security that is created correctly converts into cash through a genuinely fast procedure; security that was never properly created converts into litigation about why you hold nothing.