1 International Investment in China and the Bit Programme
Norah Gallagher, Wenhua Shan
- Arbitral tribunal — World Trade Organization (WTO) Dispute Settlement Body
1.01 The success of the People’s Republic of China (hereinafter China or PRC) in attracting foreign direct investment (FDI) in the last decade is undisputed and unprecedented. Since 1993, China has consistently maintained its position as the largest FDI recipient among developing countries and one of the largest in the world1 (see Figure 1.1: FDI in China 1979–2007, para 1.11). In 2002, China (p. 2) outstripped the US and became the largest FDI recipient in the world.2 By the end of 2007, China had accumulated an FDI stock of over US$768 billion.3 Yet China has also become the largest foreign investor among developing states and the 13th largest investor in the world, with a dramatic surge of outward investment in recent years 4 (see Figure 1.1, para 1.19).
1.02 This success in international investment activities, particularly in attracting FDI, is often attributed to, among other things, China’s effort to improve its regulatory framework for FDI, including its extensive investment treaty network.5 UNCTAD statistics show that China ranked second in the league table on the number of bilateral investment treaties (BITs), next to Germany.6 By the end of July 2008, China had concluded BITs with 126 states7 (Appendix I: List of signed Chinese BITs). In addition, China has signed up to the agreements of the World Trade Organization (WTO), the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), the Convention Establishing the Multilateral Investment Guarantee Agency (MIGA Convention), a Free Trade Agreement with the Association of South-Eastern Asian Nations (ASEAN), and has been very active in negotiations on a multilateral investment agreement (MIA).
(p. 3) 1.03 This book is a first attempt to provide a comprehensive commentary on Chinese investment treaties, focusing on the 126 Chinese BITs.8 It considers the current role of investment treaties in China’s foreign economic policy, analyses and interprets the key provisions of the BITs, and discusses the future agenda of China’s investment programme. It also looks at how this investment regime interconnects with the domestic system and considers the implications for a foreign investor in China. It concludes by making suggestions for a revised Model BIT for China, a balance between state sovereignty and ensuring continuing FDI growth.
1.04 As an introduction, this chapter will first briefly explore the changing role of China in international investment, followed by an elaboration of the main forms of foreign investment in China. It then moves on to analyse aspects of the Chinese investment treaties, focusing on the evolution and features of the BIT programme and the legal status of investment treaties within the Chinese legal system. The chapter finishes with a brief introduction to the present book.
1.05 A brief look at the history of China’s international investment activities helps one to understand the general background against which the Chinese investment treaties evolved. The following sections look first at the history of FDI in China and then that of outward direct investment (ODI) from China. It shows that a change of role for China has taken place: from an important FDI recipient towards an important recipient and source of FDI at the same time. China has as a result become much more selective in the type and quality of investment it seeks to attract. This change in approach is of itself indicative of the success China has had in attracting large amounts of FDI in a relatively short period of time (in just under 30 years).
A Brief History of Foreign Direct Investment in China
1.06 The history of FDI in China can be divided into four stages: nationalization and exclusion (1949–1978), gradual resumption (1979–1991), first surge (1992–2000), and second surge (2001–present).9
1949–1978: New China and the Nationalization and Exclusion of FDI
1.07 The People’s Republic of China was established in 1949, but FDI was not welcomed by the country until 1978 when the open-door policy was adopted. This does not mean, however, that there was no FDI in China before 1978. Indeed, when the PRC was established in 1949, there were considerable foreign enterprises in China, which actually controlled some of the key sectors of the ‘modern’ economy such as railway, mining, textiles, urban services, and steam navigation.10 However, the communist ideology rejecting the notion of private property, together with the anti-imperialist sentiment throughout the country in the 1940s and US-led diplomatic isolation, led the new Communist government to commit itself to eliminate those foreign investments when it came to power in 1949.11 By adopting a ‘socialist transformation of capitalist industry and commerce’ policy (or ‘hostage capitalism’ or ‘creeping expropriation’ as often (p. 5) referred to by westerners)12 and the occasional ‘retaliatory requisition’,13 the Chinese government effectively eliminated foreign investment in the country (except for some joint ventures set up with former Soviet Union states14) over a period of seven years.15 In the following twenty years foreign investment was effectively excluded from China.16
1.08 Two decades of exclusion of FDI, however, did not render China with stability or prosperity. On the contrary, huge social disorder and economic disruption ensued.17 By the late 1970s the national economy was on the brink of collapse.
1979–1991: Open-door Policy and Resumption of FDI in China
1.09 Against this background, China embarked on an ‘open-door’ policy in 1978.18 The new leadership headed by Deng Xiaoping took a pragmatic view towards (p. 6) the future of China and socialism, and decided to implement in China a ‘socialist system with Chinese characteristics’.19 In a famous quotation, he said: ‘It does not matter whether a cat is black or white, as long as it catches mice’.20 Attracting FDI was one of the ‘black cats’ that was ideologically inconsistent with accepted communist ideas but practically useful in solving compelling internal problems.
1.10 Accordingly, China implemented a two-tier approach to encourage FDI inflows: promulgating local laws and regulation on the one hand, and entering into investment treaties on the other. Thus in 1979 the first piece of national legislation relating to FDI, the Law of China–Foreign Equity Joint Ventures (EJVL), was passed by the National People’s Congress. Later, on 29 March 1982, the first BIT was signed with Sweden.21 By the early 1990s, China had established a domestic legal system for foreign invested enterprises (FIEs) including basic laws and regulations on equity joint ventures (EJVs), wholly foreign-owned enterprises (WFEs), joint exploitation (JEs) of onshore and offshore petroleum resources, and a series of supplementary laws and regulation.22 At the same time, China entered into 30 BITs covering most of its major investment partners, including Germany, France, Belgium, Luxembourg, Finland, Norway, Italy, Denmark, the UK, the Netherlands, Austria, Singapore, UK, Switzerland, Australia, Japan, and New Zealand, but notably not the US and Canada (See Appendix I). In addition, China acceded to the two most important investment conventions, namely the ICSID Convention and the MIGA Convention.23(p. 7)
1.11 The adoption of the ‘open-door’ policy, coupled with the establishment of a basic domestic and international legal framework, has not only attracted initial FDI to China, but also paved the way for the future surges of FDI in the country. As Figure 1.1 above shows, from 1979 there was a gradual but steady growth of FDI in China, which took off after 1992 with further increases after 2001.
1992–2000: Market Economy and the First Surge of FDI Inflow
1.12 The years following 1991 saw a surge of foreign investment in China. As Figure 1.1 above shows, in six years there was a tenfold increase of annual FDI inflow in China, from merely $4.3 billion in 1991 to $45.2 billion in 1997. The main policy change underlying such a surge was the acceptance of ‘market economy’ and the introduction of ‘socialist market economy’ as the goal of economic reform in 1992. In the spring of that year, Deng Xiaoping took a visit to the south of China which was the frontline of the experiment of economic reform and ‘open-door’ policy, and remarked that there was no inevitable conflict between ‘the market’ and ‘socialism’ and that it was not a problem to implement a ‘market economy’ in a socialist country.24 The goal of China’s economic reform was thus set: to establish a ‘socialist market economy’.25 In 1993, the Constitution was (p. 8) revised and the development of a socialist market economy became one of the fundamental policy goals of the State.26
1.13 A particular move relating to this new concept was that the government decided in the same year to gradually implement ‘national treatment’ for foreign invested enterprises.27 As a result, a number of old laws and regulations were modified and new ones introduced, in order to provide a level playing field for both FDI and national investors in China.28 At the international level, China became very active in entering into BITs, with sixty-six BITs signed during this period, more than twice the number entered into in the previous decade. (see Appendix I and Figure 1.1.) This much-extended BIT network, the liberalization of the domestic FDI regime notably through the national treatment movement, and, more significantly, the adoption of a ‘market economy’, were the main reasons for the first wave of FDI in China.
2001–present: WTO Admission and the Second Surge of FDI Inflow
1.14 As Figure1.1 shows, the second dramatic increase in FDI started in 2001, the year in which China joined the World Trade Organization. Statistics show that FDI in China was nearly doubled within the first five years of WTO admission, from $40 billion in 2000 to more than $72 billion in 2005.
1.15 Undoubtedly, China’s entry into the world trading system, including the efforts made by the country’s government to bring its laws and regulation into line with the WTO requirements, played a key role in this development.29 The WTO regime is by its name a ‘trade’ regime, but it has great significance to international investment flows. Many of the WTO agreements are closely related to international investment. The General Agreement on Trade in Services (GATS), for example, is regarded as the agreement for ‘investment and growth’ because it helps to improve market access and operation conditions for FDI in services industries. Another agreement, the Agreement on Trade-Related Investment Measures (TRIMs), also helps to liberalize international investment flows as it eliminates (p. 9) certain restrictive investment measures.30 In order to meet these requirements imposed by the WTO, as well as the special undertakings made by China in the course of WTO entry negotiations, China has massively modified its trade and investment laws and regulations.31
1.16 Meanwhile, China has signed another forty-three BITs, including renegotiated BITs with several European countries such as the Netherlands, Germany, Finland, Belgium, Luxembourg, Spain, and Portugal. The great signalling effect of the WTO entry, the specific improvements resulting from the aforementioned Government efforts, together with the rapid economic growth, must have been the main driving force for the second, current surge of FDI in China. Given that the country is still politically stable and economically booming, it is very likely that the current surge will be sustained.
1.17 Indeed, what concerns the Chinese government now is no longer how to attract much more FDI but how to attract FDI of higher ‘quality’, demonstrating a change of emphasis from ‘quantity’ to ‘quality’.32 This change has been most clearly demonstrated in the eleventh Five-Year Plan on the Utilization of Foreign Investments published in 2006 (the 2006 Plan)33 and the 2007 revision of the Guiding Catalogue of Industries for Foreign Investment (the 2007 Catalogue).34
1.18 The 2006 Plan was the first plan on foreign investment published by the Chinese Government.35 The key word in the Plan is ‘quality’, as against ‘quantity’. Using the language in the Plan, the Government will ‘propel the utilization of foreign investments to be fundamentally converted from ‘quantity oriented’ to ‘quality oriented’, practically transfer the focus from making up deficiencies of funds and foreign exchanges to bringing in advanced technologies, management experiences (p. 10) and skillful personnel’.36 In other words, a ‘selective approach’ has been introduced in this plan. Two other significant features of the Plan include ‘environment-friendliness’ and ‘innovation-orientation’.37 Thus the plan emphasizes that China will ‘pay more attention to ecological construction, environmental protection, conservation and comprehensive utilization of resources and energies’, whilst promoting ‘the improvement of the integrated innovation ability and the re-innovation ability’.38 The 2007 Catalogue was the fourth revision of the Catalogue and was an important step to implement the ‘selective approach’ adopted in the 2006 Plan. Details on the 2007 Catalogue are discussed further below.
A Brief History of Outward Direct Investment from China
Pre-1998: Development and Regulation
1.20 Between 1949 and 1978, at the time when FDI was expelled and excluded from China, there was no real outward Chinese investment either. Although there were some overseas offices and enterprises set up by major Chinese state trading, transport, and banking companies at major foreign ports and cities including New York, London, and Paris, these offices and enterprises were small in size and mainly engaged in foreign-trade activities.39
1.21 China’s non-trading overseas investment did not start until she committed herself to an ‘open-door’ policy. The number and the size of investments were, however, very limited initially. Statistics show that by the end of 1991, there were only 1005 non-trading Chinese enterprises abroad investing a total amount of slightly over $1 billion.40 The main fields of investment included resources development, processing and assembly, contract engineering, finance and insurance, shipping services, and Chinese restaurants.41 This period can be regarded as the start-up and experiment period for Chinese ODI.
(p. 12) 1.22 As it did on FDI inflows, the adoption of a ‘market economy’ had a significant impact on ODI flows. As Figure 1.1 above shows, ODI from China surged in 1992 and 1993 and throughout the 1990s it remained at a much higher level than that achieved prior to 1992. However, it is noted that during the period from 1980 to 1998, China’s general policy towards ODI was conservative and characterized by ‘regulation’.42 In other words, the main concern for the Chinese Government at that time was to attract FDI in China, and ODI was more of a supplement of China’s foreign trade than an independent strategy in its own right.43 Both FDI inflow and export trade helped to strengthen China’s position in foreign exchange (forex), which had long been in short supply.44
Post-1998: ‘Going Abroad’ Policy and Its Implementation
1.23 With rapid economic growth, including a sharp increase in FDI, trade surplus, and forex reserve, China started to seriously consider an ODI strategy.45 In 1998, the Central Committee of the Communist Party of China (CPC) suggested that ‘it is necessary to consider seriously and implement the ‘Going Abroad’ strategy, positively explore international markets and take advantage of resources abroad, thus strengthening the development impetus and potential of the Chinese economy’. It is observed that the Going Abroad strategy mainly refers to ODI.46 Three years later, the strategy was for the first time included in the country’s tenth Five-Year Plan. On 4 October 2003, the Central Committee of the CPC repeated its commitment to the implementation of the Going Abroad strategy.47 The State Council issued on 22 July 2004 an important regulation to simplify the ODI approval process, abolishing the old substantive examination regime and replacing it with a mere ‘registration’ requirement.48 In addition in recent years relevant Chinese authorities have taken a series of measures to promote Chinese ODI and to implement the (p. 13) Going Abroad strategy.49 It can thus be seen that although the strategy was proposed in 1998, it was not effectively implemented until recent years, notably in 2004 when the ‘registration’ regime was adopted. This helps to explain the fact that 2004 was the first year of a continuous surge of Chinese ODI.50
1.24 More fundamentally, the surge of ODI was due to the economic success brought about by the WTO entry, particularly the huge trade surplus and the explosion of FDI inflow, which in turn resulted in an enormous forex reserve. As a matter of fact, in 2004 China had cumulated a historic $609 billion forex reserve, a sufficient amount for the country to comfortably implement an ODI strategy. From then on the main concern of the Chinese government was no longer how to attract FDI and build up a large forex reserve, but to make good use of the reserve, and further strengthen the economy.51 One way forward is obviously ‘going abroad’ and making ODI.52
1.25 As a result, Chinese annual ODI doubled in 2005, reaching $12 billion from only $5.5 billion in 2004. A further sharp increase ensued in 2006 ($16.1 billion) and 2007 ($18.7 billion), elevating China to thirteenth place in the world’s ODI league table. China’s forex continued to grow to a record high of $1760 billion by the end of April 200853 and with the establishment of a forex investment company,54 further rapid growth of Chinese ODI can be expected in the future55 (see Figure 1.1).(p. 14)
1.26 The preceding sections have demonstrated a change of role of China in international investment: On the one hand, China has sustained a decade-long huge success in attracting FDI inflow, so much so that no longer is she so keen on attracting as much as possible FDI; rather, she has now become more selective on inward FDI, aiming at FDI of higher ‘quality’. On the other hand, China has already become an im-portant source of FDI, with tremendous potential.56 As will be discussed below, this change of role has had an impact on China’s international investment treaty making.
1.27 The focus of this book is on FDI in China and the forms of foreign investment are central to many of the topics discussed throughout this book. An overview of these types of transactions including the contracts involved in some of the investments has therefore been set out below.
(p. 15) 1.28 According to the Ministry of Commerce, the most frequently used forms of FDI in China are joint ventures including equity joint venture (EJV) and contractual joint venture (CJV), wholly foreign-owned enterprise (WFE), joint exploitation (JE), and stock company with foreign investment (SCFI).57 These joint ventures are now the most popular form of FDI, accounting for nearly 52% of the total FDI in China (among them, 37% are EJVs and 14% are CJVs), followed by WFE (44%) and JE (1.18%)–see Table 1.1 below. Meanwhile, certain ‘new forms’ of FDI have also been explored and expanded in China particularly in recent years. They are holding company with foreign investment (HCFI), build-operate and transfer (BOT) and foreign-invested merger and acquisition (M&A).58 The following sections introduce these forms of foreign investment and analyse the relevant investment contracts.
Table 1.1 FDI in China by form of investment (by the end of 2005)59 ($100 million)
1.29 If a foreign investor wants to invest in China but for some reason does not want to take on all the risks, he/she may decide to cooperate with a local Chinese firm and set up a Sino–foreign joint venture. The joint venture can be an equity joint venture, under which the rights and obligations of the JV partners are divided in accordance with the equity (shares) they possess, or a contractual joint venture, under which everything is defined by the JV contract between the partners.60
(p. 16) 1.30 From 1979 when the Law of Sino-Foreign Equity Joint Ventures (EJVL) was passed,61 until 1986 when the Law of Wholly Foreign Owned Enterprises (WFEL)62 was promulgated, EJVs were the first and only form of foreign investment in China. CJV investment was made legally possible only in 1988 when the Law of Sino-Foreign Contractual Joint Ventures (CJVL)63 was adopted. As shown in Table 1.1, JVs are still the most popular form of FDI in China.
1.31 In either an EJV or a CJV investment, a contract between the two JV partners is essential. According to relevant Chinese legislation, such JV contracts have to be approved by the central or local authorities before they take effect.64 Such legislation also generally requires the JV parties to conclude an ‘agreement’ (Xieyi), in addition to the contract (Hetong).65 The agreement is a written document between the JV parties with regard to the principles and main aspects on the establishment of the JV business,66 which the parties normally formulate at an earlier stage of their negotiation. In contrast, the JV contract is normally formulated at a later stage, which stipulates the detailed rights and obligations of the parties with regard to the establishment of a JV enterprise.67 In case of any conflict between the two instruments, the contract prevails.68 The duality of contractual instruments obviously may result in confusion among foreign investors. Chinese legislation nevertheless provides that the JV parties may opt out of the ‘agreement’ requirement if they so agree.69
(p. 17) 1.32 Chinese law has detailed stipulations with regard to the contents of a JV contract.70 It also requires that Chinese law be the law governing JV contracts, including their formation, effect, interpretation, execution, and the settlement of any disputes related thereto.71 This certainly has implications on the settlement of investment disputes, which will be discussed in chapter 8.
Wholly Foreign-owned Enterprise (WFE)
1.33 A wholly foreign-owned enterprise is an enterprise established in China with capital solely invested by one or more foreigners.72 According to the Law of the Wholly Foreign Owned Enterprises (WFEL), a WFE must be beneficial to the (p. 18) development of the Chinese economy.73 The WFEL used to require WFEs to adopt advanced technology and equipment74 or marketing all or most of their products outside China,75 a requirement which has been abolished as a result of the recent amendment.76 WFEs normally take the form of a limited liability company (LLC) and are excluded or restricted in certain fields, as stipulated in the Investment Guidance77 and the Guiding Catalogues.
1.34 As foreign investors have become more and more familiar with the Chinese investment environment, WFE has become a very popular investment vehicle.78 As Table 1.1, para 1.28, shows, WFEs now account for nearly 45% of FDI in China and are likely to overtake JVs (now CJV and EJV together are less than 52%) and become the primary form of FDI in the near future.79 Indeed, it has been widely reported that there is an increasing trend among FIEs, particularly large transnational corporations, in transforming from a joint venture to a wholly foreign-owned enterprise (duzihua).80 This phenomenon has caused many concerns, since it might exacerbate the increasing trends of foreign monopoly or control in important industries, the withering of national brands, and fewer opportunities for Chinese enterprises to learn from their foreign counterparts.81
1.35 Joint exploitation includes joint exploitations of onshore or offshore petroleum resources. From the early 1980s, China started to lay down laws accepting and (p. 19) attracting foreign investment in joint exploitation of its on-shore and offshore oil resources. In 1982, the first of such laws, the Regulations on the Exploration of Offshore Petroleum Resources in Cooperation with Foreign Enterprises (hereinafter the REOFF), was promulgated to allow foreign investors to participate in joint exploitation and development of China’s offshore oil resources.82 Eleven years later, China passed the Regulations on the Exploration of Onshore Petroleum Resources in Cooperation with Foreign Enterprises (hereinafter REON) to regulate joint exploitation operations with foreign companies on onshore oil resources.83 Both regulations were amended in 2001 by the State Council, in an effort to bring them into conformity with China’s WTO commitments.84 Apart from the two main regulations, there is a range of laws and regulations that is also relevant to the joint exploitation of oil and gas resources.85
1.36 As can be seen in Table 1.1, para 1.28, 191 joint exploitation projects had been set up in China by the end of 2005, contributing $7.5 billion of capital.86 Whilst joint exploitation accounted for only about 1% (1.18%) of the total foreign direct investment in China, the average amount contributed in JE investment has been substantial ($39.3 million). The following paragraphs take joint exploitation of offshore petroleum resources as an example to examine the legal aspects of a joint exploitation project.87
(p. 20) 1.37 In accordance with the REOFF, foreign investments, profits, and other legitimate rights of foreign enterprises and their offshore cooperative exploitation activities are protected by the law.88 Likewise the Law of Mineral Resources stipulates that ‘the state shall guarantee the lawful rights and interests of mining enterprises established according to law in the exploitation of mineral resources’.89 The REOFF also generally guarantees that China will not expropriate the investment and income of foreign enterprises, and that appropriate compensation will be given in case of expropriation under exceptional circumstances.90 Neverthless the REOFF requires that all joint exploitation activities shall be conducted in accordance with relevant Chinese laws and regulations and that foreign enterprises and individuals be subject to Chinese law and shall accept inspection and supervision by competent Chinese authorities.91
The China National Offshore Oil Corporation (CNOOC) may cooperate with foreign enterprises to exploit offshore petroleum resources by means of entering into petroleum contracts, and, unless otherwise stipulated by laws and administrative regulations or specified in a petroleum contract, the foreign enterprise which is one party to the petroleum contract (hereinafter ‘foreign contractor’) shall provide the investment to carry out exploration, be responsible for exploration operations and bear all exploration risks; after a commercial oil (gas) field is discovered, both the foreign contractor and CNOOC shall provide the investment for their cooperative development, and the foreign contractor shall be responsible for development operations and production operations until CNOOC takes over the production operations when conditions permit as provided in the petroleum contract. The foreign contractor, in accordance with the provisions of the petroleum contract, may recover its investment and expenses and receive remuneration out of the petroleum produced.93
(p. 21) 1.39 Thus the joint exploitation is arranged by a ‘petroleum contract’ between a Chinese party, the CNOOC, and a foreign contractor, which covers both stages of operation: exploration and exploitation.94 At the exploration stage, foreign companies shall provide all the capital and take all the risks. If the exploration fails, the investment will not be recoverable. In this sense it is a risk contract. However, once oilfields with commercial values are found, both the Chinese and foreign sides shall jointly provide the exploitation capital to develop and produce the oil/gas fields, and the foreign contractor may recover its investment and expenses and receive profit out of the petroleum produced. In this sense, it is a ‘product-sharing contract’ (PSC). Indeed, some recent official documents have directly referred to this term as a model of joint exploitation contracts.95 For instance, in May 2001 the CNOOC signed a PSC with Santa Fe Energy Resources (China) Ltd, which covers the exploration area of Block 27/10 in the Pearl River basin of 6546 square kilometres.96
1.40 In the joint exploitation contract, most of the terms and conditions are fixed and only limited areas are open for further discussion.97 Such contracts cannot enter into effect until they are officially approved by the Chinese Ministry of Commerce.98 The contract may run for a period as agreed by both parties, though the upper ceiling normally is seven years for an exploration contract and thirty years for production from the effective date of the contract.99
1.41 One of the features of joint exploitation contracts is that they tend to be long-term contracts involving significant commercial risks. During such a long period of time, the political, economic, and other conditions of a state may undergo significant or fundamental changes, which may result in governments changing their laws or regulations, or specific commitments made to foreign investors. In an (p. 22) effort to restrict such changes by the host state, foreign investors sometimes insert a ‘stabilizing clause’ in their investment contracts with the host state. Some governments also guarantee such stability in their domestic laws and regulations.100 However, modern stabilization clauses seem to have transformed into renegotiation and adjustment clauses, providing that if the government changes the law in ways that affect the economic equilibrium of the investment project, the contract may be adjusted to maintain the economics of the project as originally agreed.101 The same transformation may also have taken place in Chinese law with regard to stabilization clauses, which will be discussed below.
1.42 The rule on applicable law to joint exploitation contracts is similar to those on joint venture contracts, that is, Chinese law is the governing law.102
Stock Company with Foreign Investment
1.43 A stock company with foreign investment is a company whose capital is made up of shares contributed by both domestic and foreign shareholders, with foreign shareholders owning no less than 25% of the company’s total registered capital.103 This form of investment has been historically low (see Table 1.1) but this may change in the future. The company undertakes external liabilities with its total assets, and each shareholder undertakes the liabilities in proportion to the shares held.104 The registered capital of a SCFI, ie the total capital recorded with the registering authority, shall be no less than 30 million RMB Yuan (roughly US$4.4 million).105 A SCFI may be established by means of promotion or public offer, but it must be in conformity with the national industrial policy towards foreign-invested enterprises.106
1.44 In 1995, China promulgated an interim regulation on holding companies with >foreign investment,107 with a view to encouraging large transnational corporations to make a series of investments in China. This interim regulation has been replaced by the Provisions on Holding Companies with Foreign Investment published in June 2003. According to the Provision, a HCFI may take the form of an EJV, CJV, or WFE but must be incorporated as a limited-liability company.108
1.45 BOT is a relatively new form of investment,109 often used for large infrastructure and public utility projects such as highways, ports, dams, mass transit systems, power plants, water supply systems, and industrial estates.110 The first BOT project in China was introduced in 1995111 and since then it has been commonly used in energy, transport, communication, and environment projects.112 The first (p. 24) Chinese law dealing with BOT projects is the MOFCOM (then MOFTEC) Notice on Some Issues about Utilizing Foreign Investment in the Form of BOT (the MOFCOM BOT Notice) adopted in January 1995. Later in the year came the Notice on Issues about Approval Procedures of Foreign Invested Concession Projects jointly promulgated by the State Planning Commission, the Ministry of Electricity, and the Ministry of Transportation (the Joint BOT Notice). The Interim Measures on the Administration of Overseas Project Financing Activities adopted in 1997113 is also an important law that is closely related to BOT investment. These legislative measures constitute the legal framework for BOT investment in China.114
1.46 According to the Joint BOT Notice, a BOT project is a scheme under which a government authority enters into a concession agreement with a project company set up by foreign investors for the purpose of the BOT project.115 Under the agreement, the project company is responsible for the investment and finance, engineering design, construction, equipment purchase, operation management, and fees charged, as well as the maintenance of the project equipment and facilities.116 The government authority supervises, examines, and audits the BOT project and may penalize the project company if it is behaving inconsistently with the Concession Agreement.117 The MOFCOM BOT Notice requires the project company to be established in the form of an EJV, CJV, or WFE.118
Merger and Acquisition
1.47 As merger and acquisition has become a major form of international investment and is predicted to become the most important form of foreign investment in (p. 25) China in the future,119 China has laid down regulations to facilitate its development.120 According to Chinese law, there are two categories of M&A: equity M&A and asset M&A.121 An equity M&A is where a foreign investor purchases the equity of a domestic enterprise and transforms it to an FIE.122 An asset M&A is when a foreign investor establishes an FIE and purchases assets of a domestic enterprise and operates those assets through that FIE, or a foreign investor purchases assets of a domestic enterprise and establishes an FIE with the purchased assets.123 Again, a foreign investor should contribute no less than 25% of the equity in the enterprise established after M&A to qualify the enterprise as an FIE eligible for the relevant FIE treatment and the M&A should be in conformity with national industrial policy.124
The 2007 Catalogues
1.48 In choosing the appropriate form of investment, it is advisable to check the two most important instruments on investment admission in China, namely the Guidance on the Direction of Foreign Investment (Investment Guidance)125 and its attached Guiding Catalogue of Industries for Foreign Investment (Guiding Catalogue).126 The Chinese Government first issued the Investment Guidance and the Guiding Catalogue in 1995, adopting the ‘negative list’ approach. Both regulations are subject to periodic revisions. The Guidance has so far been revised only once, in 2002, soon after China’s WTO accession. The Catalogue, however, (p. 26) has been subject to more frequent revisions–so far it has been amended four times.127 The first revision took place in 1997 in the aftermath of the ‘Asian financial crisis’. More tax incentives were introduced in order to mitigate the negative effects of the crisis. The Catalogue was revised again in 2002, incorporating China’s commitments to the WTO, which China joined in 2001. The third revision took place in 2004 when incentives for certain areas such as steel, cement, and electrolytic aluminium were abolished to implement the state policies of macro-economic adjustment. The 2007 revision is the latest one, which reflects both the latest development of macro-economic policies and the need for further opening-up after the completion of the WTO transition period. It is reported that this revision process started in 2005 and had considered opinions from forty-one governmental departments, sixteen key trade associations, and a large number of experts and scholars.128
1.49 The Guidance and the Catalogue classify all the foreign investment projects (FIPs) into four sub-catalogues: Encouraged, Restricted, Prohibited, and Permitted. The Encouraged, Restricted, and Prohibited industries are specifically defined while all others are classified as Permitted industries by default. FIPs in the Encouraged Catalogue enjoy certain special incentives, such as tax incentives. According to Mr Kong Linglong, Director-General of the Directorate-General of Foreign Investment at the State Development and Reform Commission, China will continue to grant tax incentives to FIPs in encouraged categories.129 Their imported equipment can continue to enjoy the exemption of import duties and import VAT, and their purchase of domestically produced equipment can enjoy rebate of VAT. He also pointed out that FIPs approved before 1 December 2007 would carry on implementing the previously applicable tax incentives policies, whilst the new policies would apply to FIPs that were approved after that date.130 In this connection, it should be noted that such incentives are not affected by the new uniform Enterprise Income Tax Law adopted in 2007, which unified the income tax rate at 25% for both domestic and foreign invested enterprises. The new income tax law does have an impact on FIEs set up in special economic areas such as special economic zones (SEZ) and economic and technology development zones (ETDZs), since there will no longer be area-based incentives for FIEs. Nevertheless, transition arrangements were devised to enable FIEs to adapt to the new policy within five years.
(p. 27) 1.50 FIPs in the Restricted Catalogue are, on the contrary, subject to certain restrictions. Some of these are linked to the modes of investment. Basically, there are three modes of foreign investment in China: EJVs, CJVs, and WFEs, as mentioned above. The Catalogue, however, requires some FIPs take the form of either CJV or EJV, not WFE. Some FIPs are subject to more stringent conditions requiring Chinese Partners Equity Control (CPEC) or Chinese Partners Relative Equity Control (CPREC). The former requires that all Chinese partners taken together control 51% or more of the total equity of the FIE, whilst the latter only requires all the Chinese partners taken together to have more equity than any one of the foreign investors.131 Such restrictions also apply to foreign-invested M&A activities.132 In accordance with Article 4 of the 2006 Provisions of Merger and Acquisition of Domestic Enterprises by Foreign Investors, in sectors which require ‘JV only’, or CPEC, or CPREC, the enterprises should maintain their status as a JV, or CPEC, or CPREC, after such merger and acquisition takes place. Likewise, in sectors where foreign investments are prohibited, foreign investors are not allowed to conduct merger and acquisition activities.
1.51 In the 2007 revised Catalogue, forty sectors are subject to the ‘EJV/CJV only’ restriction, six are subject to ‘EJV only’ restriction, and another six are subject to ‘CJV only’ restriction. Also, there are forty sectors that require CPEC, whilst three sectors require CPREC. In addition, there are some more specific maximum foreign equity requirements in certain sectors. For example, foreign capital participation should not exceed 50% in telecommunication increment service, whilst in motion tone and data service in basic telecom and interior business and international business, the maximum foreign participation is 49%. Similar foreign participation limitations can be found in sectors such as insurance companies (maximum 50% for the share of life-insurance companies), security companies (maximum one-third foreign capital, limited to A share consignment-in, B share, H share, and government and company bonds consignment-in and transaction), and security investment fund management companies (maximum 49% foreign-capital).
1.52 It can be seen from the above that the policies adopted in the 2006 Plan are well implemented in this revision. Clearly a more ‘selective’, ‘quality-oriented’ approach is taken by the Chinese Government towards foreign investment. China wants only the FIPs that are helpful to its economy and society, not just any foreign investment in any sector. Also, the ‘environment-friendliness’ principle has been taken seriously, as reflected in the added forty FIPs having energy-saving or environment-protection effects. The ‘innovation-orientation’ is also reflected in the (p. 28) fact that general manufacturing industries are no longer encouraged, whilst only high-tech industries and new material industries are still encouraged. Foreign investors interested in real estate and certain mining industries might find this new Catalogue disappointing. However, service investors probably are greatly encouraged by it. All this shows that China has become more mature in dealing with foreign investment.
1.53 In this connection, it should be noted that, in addition to the general Catalogue, China has adopted a Catalogue of Encouraged Industries for Foreign Investment in the Middle and Western Areas (Western Catalogue)133 and a Catalogue of Encouraged High-Tech Products for Foreign Investment (High-Tech Catalogue).134 The High-Tech Catalogue has been integrated into this revised Catalogue, though the Western Catalogue continues to work and is yet to be updated.
The Legal Framework of Foreign Investment
1.54 China’s huge success in international investment, particularly in attracting FDI, has been partially due to the Government’s efforts to bring its legal framework in line with international standards.135 The legal framework for FDI in China is composed of both domestic laws and international agreements. At the domestic level, China has developed a three-tiered legal system, comprising constitutional provisions, national laws, and sub-national regulations.136 The most important national laws are those on the above mentioned forms of foreign investment, namely EJV, CJV, WFE, JE, BOT, HCFI, SCFI, and M&A. Also important are the aforementioned Investment Guidance and the Catalogue, the Enterprise Income Tax Law (formerly the Income Tax Law of Foreign Invested Enterprises and Foreign Enterprises of 1991) and its Implementing Regulations, the 1986 State Council Provisions for Encouraging Foreign Investment (hereinafter PEFI) and the Opinions on Further Encouraging Foreign Investment.137
(p. 29) 1.55 At the international level, more importantly for the purpose of this current study, China has been very active in entering into bilateral investment treaties and other international investment instruments. Indeed, China has built up the world’s second most extensive treaty network for the protection and promotion of international investment.138 This treaty network includes multilateral agreements such as the ICSID Convention, the WTO agreements, and the MIGA Convention,139 regional instruments140 such as the APEC Non-Binding Principles on Investment,141 and bilateral agreements such as BITs, double taxation treaties (DTTs),142 and free trade agreements (FTAs)143–most recently and notable is the FTA with New Zealand. This is China’s first FTA with an OECD country.144 The focus of the present study, however, is Chinese BITs. The following sections therefore examine these BITs, including an overview, their evolution over the last decades, key features of the current Model BIT, and the status of such treaties in the Chinese legal system. However, before discussing the BIT programme, it is helpful to have a brief review of the legal changes and the ‘stabilisation clause’ under Chinese law.
If new legal provisions have been adopted whilst contracts for Sino-foreign equity joint ventures, Sino-Foreign contractual joint ventures, or Sino-foreign joint exploitation of natural resources, which have been concluded with the approval of the state, are being performed within the territory of the People’s Republic of China, such contracts can still be performed on the basis of the terms of the contracts. (emphasis added)148
1.57 The law also stipulated that it can apply to contracts concluded before it entered into effect where the parties to the contract so agreed.149 Such provisions demonstrated that the Chinese government was eager to assure foreign investors that the legal environment of FDI in China would be sound and stable. Yet the implication of such ‘stabilisation’ commitment in a national law has been so significant that it substantially limits government’s power to effectively regulate foreign investment. As a result, these stabilising clauses in the Foreign Economic Contract Law were repealed when the law was amended and amalgamated into a new unified Contract Law in 1999. Chinese standard petroleum contracts, nevertheless, still contain a modern stabilising clause, or a re-negotiation and adjustment clause.150
(p. 31) 1.58 In this connection, it is useful to recall that some Chinese BITs have also included relevant provisions either affirming the host state’s rights to change their laws and regulations151 or requiring contracting parties to ‘make responsible arrangements for the appropriate interest of the foreign investors’.152 Indeed, the Chinese Government endeavours to make any legal changes as smooth as possible by providing transition arrangements. For example, both the previous Income Tax Law of Foreign Invested Enterprises and Foreign Enterprises153 and the current universal Enterprise Income Tax Law154 have such transition provisions.
Chinese BITs: Basic Facts
1.59 Since the first BIT was signed with Sweden in 1982, China has signed 126 BITs. Over half of them (68 BITs) were entered into in the 1990s; others were signed in the 1980s (24 BITs) and the 2000s. The fact that most Chinese BITs were signed in the 1990s shows that China was not an exception to the worldwide BIT boom at that time. However, country-specific factors, such as China’s acceptance of the (p. 32) ICSID regime and the adoption of a ‘market economy’, must also have played a significant role.
1.60 Another fact that should be noted is that eleven BITs were renegotiated (in the form of either a new BIT or an amendment protocol) in the 2000s. Most of these renegotiated BITs were with European states, which signed BITs with China in the early years and wanted to update and upgrade them. In addition, China has so far concluded two free trade agreements that contain a BIT-type chapter, namely the FTA with New Zealand and another with Pakistan. This means that China’s BIT treaty-making activities in the 2000s has been more active than the number suggests (Appendix I).
1.61 Geographically, Chinese BITs cover most continents including Asia, Europe, Africa, Latin America, and Oceania. The Chinese BIT network is most dense in Asia, which covered forty out of the forty-four states in the continent. Important investment partners such as Japan, Korea, Singapore, India, Russian, Iran, Saudi Arabia, Kuwait, and Kazakhstan are all covered by the BIT network. Europe is the second continent in terms of numbers of treaties, with 76% of the European states being covered by China’s BIT network, including twenty-five of the twenty-seven Member States of the European Union.155 In Africa, more than half of the states (thirty-one of fifty-three) have a BIT arrangement with China. They include important investment partners such as South Africa, Egypt, Nigeria, Sudan, Congo, and Kenya. The Chinese BIT network also covers four Pacific states including, most importantly, Australia and New Zealand. In Latin America, Chinese BITs cover thirteen countries, including major states such as Argentina, Bolivia, Uruguay, Ecuador, Chile, and Peru. China recently signed a BIT with Mexico.156 Notably, however, China has not yet concluded a BIT with Brazil. This was probably due to the country’s general reluctance to sign and ratify BITs.157
1.62 The most striking exception to the extensive coverage of the Chinese BIT network is North America, notably the US and Canada. China has yet to enter into BITs with either state, which are ranked No. 3 and No. 15 respectively on the list of top (p. 33) investors in China.158 Negotiations with the US on a BIT started as early as 1983 but failed due to wide divergence between the two sides on a range of issues.159 Now Canada is negotiating with China for a BIT.160 After lengthy discussion, the US and China recently announced the re-opening of BIT negotiations.161 Given the current trend towards conservatism among many states regarding BITs and the highly prescriptive formula adopted by the US, it will be interesting to see whether a further attempt at negotiations would produce a BIT that satisfied both states.
Chinese BITs: Treaty-making Process
1.63 China’s treaty-making practice is governed by the Law on the Procedure of the Conclusion of Treaties.162 In accordance with this law, treaties or agreements negotiated and signed in the name of the Government of the People’s Republic of China should be examined and decided by the State Council, upon recommendation of the Ministry of Foreign Affairs (MFA) or recommendation of a department concerned under the State Council after consultation with the MFA.163 However, the Law does not provide detailed rules on the negotiation and approval process. In practice, the making of a investment treaty in China is primarily undertaken by the Directorate-General of Treaty and Law (DGTL) under the Ministry of Commerce, and it normally involves the following nine steps.
Step 1: Request for Authorization (Qingshi): when there is a need to negotiate a new BIT, MOFCOM (normally initiated and drafted by the DGTL, more specifically by the officials in charge of investment treaties within the DG) will, (p. 34) after consultation with the MFA, make a joint application with the MFA to the State Council, asking for permission for the negotiation of such an agreement.
Step 2: Approval (Pifu): The State Council, if it approves of such Qingshi by the MOFCOM and the MFA, will issue a Reply of Approval (Pifu).
Step 3: Negotiations (Tanpan): With the Pifu, the MOFCOM officials conduct negotiations with the foreign counterparts. Such negotiations normally take place in Beijing and the capital of the counterparty in turn.
Step 4: Initialling (Caoqian): After an agreement is reached, the heads of the two delegations of negotiation initial the agreed treaty text.
Step 5: Formal Request for Authorization (Zhenshi Qingshi): MOFCOM will then, again jointly with the MFA, make a formal application to the State Council for formal signature of the agreement. In the application, the initialled treaty text and the proposed activities of signature (including the proposed event and the person to sign the treaty) are normally attached.
Step: 6: Formal Signature: After an approval has been obtained from the State Council, the investment agreement can be formally signed, normally by an official of ministerial level or above. There is usually a ceremony for the signature.
Step 7: Record: According to practice, investment treaties do not need formal ratification by the Standing Committee of the National People’s Congress (NPC), or further approval by the State Council. Rather, it is only required to be submitted (by MOFCOM) to the State Council for the record. In practice, they are submitted to the MFA only for the record. The domestic legal procedure for the treaty to be effective is hence completed.
Step 8: Exchange of Diplomatic Notes: The MFA will then notify the foreign counterpart with a diplomatic note of the fact that China has fulfilled the domestic legal procedures for the treaty. The foreign counterpart may issue a similar note in exchange.
Step 9: Entry into Force: The treaty normally enters into force within a certain time after the exchange of notes, depending on the treaty provisions.164
1.64 The aforementioned treaty-making practice is relatively sophisticated and may not deviate very significantly from practice in other countries. However, given the deep and far-reaching impact investment treaties have on the economy and society of the host state, it would be reasonable to require such treaties be formally ratified by the NPC Standing Committee.
1.65 The Chinese BIT programme, since its inception in 1982, has experienced three periods and three generations of BITs. The 1980s was the first period featured by the first-generation of Chinese BITs; most of the 1990s was the second period characterized by the second-generation BITs; the third-generation BITs emerged in the late 1990s and marked a commencement of a third period in the history of Chinese BITs. It should be noted, however, that although each generation of BITs characterized a given period, there could be BITs of different generations coexisting in a given period. There are therefore BITs signed in the second or third period that display essential features of the first-generation BITs. Inevitably, however, the BITs signed by China tend to reflect the three Model BITs that were in place at the time.
1982–1989: The Launch of the BIT Programme and the First-generation BITs
1.66 The launch of the Chinese BIT programme was a result of the aforementioned ‘open-door’ policy adopted in late 1970s. In order to fuel economic growth, China then adopted an extensive plan of modernization, in which the introduction of FDI as well as advanced technology and management skills was listed among the top goals.165 Accordingly, the first FDI law, the EJVL, was adopted in 1979, sending out the first legal signal of welcome to foreign investors. A number of other laws and regulations were also adopted in the following years to address related issues such as income tax, labour management, forex control, etc.166 More importantly, the Constitution was amended in 1982 to include a new article specifically referring to foreign investment and confirming its protection under Chinese law.167
First, although the opening policy has been stated and reaffirmed from time to time, it is still new in the eyes of some people and therefore they cannot fully believe it, as China by nature is a socialist country with a central planning dominant in its economic life, a situation which is quite different from free market economies. (p. 36) The treatment and protection accorded by domestic law and promised by policy cannot in a short time erase the mis-trust rooted in some people’s minds as they think that policies could be changed without taking responsibilities for past promises. It is believed that by committing to international obligations through bilateral agreements, the trust and confidence of foreign investors can be won.169
1.68 Another motivation for BITs, as observed by Li, was the protection of overseas Chinese investment as China also became active in ODI activities (the amounts of which were increasing dramatically). This can be more clearly seen in Chinese BITs entered into with other developing states and transition economies, which aimed at promoting south–south cooperation and ‘comradely relation-ship’.170 However, given the fact that China was, on the whole, predominantly a FDI recipient at that time, the focus of China’s BIT policy then was undoubtedly to protect and promote inward rather than outward investments.171
1.69 Against this background, it is unsurprising that the earlier Chinese BITs mainly targeted industrialized states, or capital-exporting states. In the three years after the signature of the first BIT with Sweden in 1982, all of China’s BITs were entered into with developed states in Europe, such as Germany, France, Belgium–Luxembourg, Finland, and Norway. Negotiations for a BIT with the US were also initiated in 1983, but these eventually failed.
1.70 From 1985, however, Chinese BITs became diversified. First, China started to sign BITs with developing states whilst continuing to enter into BITs with other developed states. From 1985 until 1989, new BITs were signed with developed states such as Denmark, the Netherlands, Austria, the UK, Switzerland, Australia, Japan, and New Zealand. Meanwhile, Thailand became the first developing state to sign a BIT with China. This was followed by Singapore, Kuwait, Sri Lanka, Malaysia, Pakistan, and Ghana. Second, a BIT was also entered into with Romania, China’s first BIT with another socialist country. Later on, BITs were entered into with transition economies such as Poland and Bulgaria. The geographical range of Chinese BITs started to spread, from merely Western Europe to reach Eastern Europe, Asia, and Africa.
(p. 37) 1.71 Early Chinese BITs were relatively conservative, which was reflected in the first and the second Model BITs. This was consistent with state practice at that time.172 China’s first Model BIT was formulated in around 1984, after the China–France BIT was signed. It incorporated the basic provisions such as definitions, fair and equitable treatment, most favoured nation treatment, expropriation and compensation, compensation for damages and losses, transfer, subrogation, and a ‘preservation of rights’ clause. This early BIT also stipulated that investor–state disputes concerning the amount of compensation for expropriation could be submitted to an ad hoc arbitral tribunal whilst other disputes should be dealt with by local courts (see Appendix II: Chinese Model BIT Version I). This early prototype, which was quite typical in format to many former communist states, was revised in the late 1980s when the second Model BIT was adopted. It retained the main framework of the first version but included a qualified national treatment standard (subject to local laws) and an umbrella clause. The details on compensation for expropriation were also modified, with the concept of ‘market value’ and elements of evaluation being included in the provisions on expropriation (see Appendix III).
1.72 Whilst the general contents are pretty similar, it has been noted that Chinese BITs entered into with developing states displayed certain special features, compared with BITs with developed states.173 First, the general atmosphere was one of encouragement and promotion of investment, which was reflected not only in the preamble but also in more specific provisions such as those on the definition of ‘investment’ and the consultation process.174 Second, the principle of state sover-eignty and national jurisdiction was repeatedly emphasized. For example, the BITs with Thailand, Singapore, and Sri Lanka all required that investments must be specifically approved by the host state before they could benefit from the BIT protection. These BITs stipulated that the question of legality of an expropriation should be determined by competent local courts rather than any international tribunals.175 Third, more flexibility was given to suit the needs of the relevant BIT partners. This was mainly reflected in the area of monetary transfer provisions.176
1.73 The Romania BIT, the only BIT with a socialist country signed during this period, was likewise similar to other Chinese BITs, although it was more concise (with only ten articles) and was characterized by a ‘comradely relationship’.177 (p. 38) Moreover, two distinctive features have been observed. One is that the definition of ‘investment’ was extended to include ‘indirect participation’, which covers holding companies that make a series of investments in the host country. The other is an extraordinary provision for the settlement of investor–state disputes. The provision covers only disputes relating to the amount of compensation in cases of expropriation and requires that such disputes be assessed first by a local body. If such disputes continued to exist, the provision went on, it should ‘be settled by the two Contracting Parties’. In other words, investor–state disputes eventually became state–state disputes.178 This harks back to the diplomatic protection which many investors had to rely on prior to the adoption of the ICSID Convention.
1990–1997: ICSID Accession and the Second-generation BITs
1.74 Created in 1965 by the ICSID Convention, the ICSID is the world’s primary institute for the settlement of investor–state disputes, which have risen sharply in recent years.179 Like many other developing states, China was originally rather sceptical or resistant to the Convention and the Centre, taking it as a threat to state sovereignty and national jurisdiction.180 The benefits brought about, however, in implementing the practice of ‘open-door’ and reform policy including the introduction of FDI, had strengthened the Chinese leadership’s belief that this (ICSID membership) was the way forward for China. This was most clearly expressed in Deng Xiaoping’s talks during his historic tour to southern China, when he launched a campaign for further economic reform and ‘openingup’ of the country, including the bold introduction of the concept of ‘market economy’ into this socialist country.
1.75 Against this background, and after extensive debates and careful consideration,181 China formally signed the ICSID Convention on 9 February 1990 and ratified it on 7 January 1993. In accordance with Article 25(4) ICSID Convention, China notified the Centre when ratifying the Convention that it would only consider submitting to ICSID jurisdiction for disputes over compensation for expropriation.182 The Convention took effect for China on 6 February 1993. (p. 39) Despite the reservation, the accession of China to the ICSID Convention was significant for Chinese investment treaty making since it made it possible for treaty negotiators to make direct reference to ICSID jurisdiction.
1.76 As a matter of fact, ICSID arbitration has always been something actively sought by some states, particularly developed states, in their negotiations of BITs with China. However, before China acceded to the ICSID Convention, they only managed to include in their BITs with China a provision stating that both contracting parties would enter into negotiations with regard to the possibility of submitting investor–state disputes to the ICSID for arbitration.183 After the accession, it became possible for an effective ICSID arbitration clause to be included in BITs. Before China ratified the Convention, Chinese BITs only allowed for the submission of disputes concerning the amount of compensation for expropriation (AOC disputes) to ICSID arbitration in cases where both contracting parties were member states of the Convention.184 Once China ratified the Convention, she started to make unconditional references to ICSID in her BIT practice. The Lithuania BIT signed in November 1993 was probably the first BIT that included such a reference. It stipulates that an AOC dispute may be submitted to the Centre for arbitration if it cannot be settled in six months by negotiation.185 Since then, a second-generation of Chinese BITs has emerged, with direct reference of AOC disputes to the Centre being its key feature. However, it should be pointed out that not all BITs signed by China after 1993 have followed this model. Rather, many of them still follow the first-generation prototype, avoiding direct reference to ICSID jurisdiction.186 This demonstrated the persistent reluctance of China in accepting ICSID arbitration.
1998–Present: The Canadian BIT Talks and the Third-generation BITs
1.77 China’s third-generation BITs, as illustrated by her latest and current Model BIT (Version III), were adopted in the late 1990s amid much speculation as to why at (p. 40) this stage China, which was attracting unprecedented sums of FDI, needed to revise its Model BIT at all. Most notably this latest model granted access to international arbitration including ICSID arbitration for all investor–state disputes. There are also some subtle and generally liberal changes in some of the substantive provisions of the current Model BIT including national treatment, which will be discussed below.
1.78 The first BIT based on this model was the Barbados BIT, which entered into force on 20 July 1998, in which China for the first time implemented the third-generation BIT including, most notably, access of all investor–state disputes to ICSID arbitration.187 The fact that Barbados became the first country to implement China’s new-generation BIT appears to be a pure coincidence.188 Our investigations show that no specific Request for Authorization (Qingshi) was submitted to the State Council for this particular BIT. Rather such request was made in May 1998 in the context of a proposed BIT with Surinam, which was approved by the State Council though the BIT did not materialize.189 In this Qingshi, the MOFTEC (now MOFCOM) and the MFA attached a standard text of the time, which included all the features of the new-generation BIT.190 The Qingshi suggested the State Council giving a general or standing authorization on such negotiations with other states based on this text, so that the MOFTEC and the MFA did not need to seek specific authorization on such negotiations, unless there were ‘major changes’ (yuanze bianhua) in the treaty text.191 Since the request was approved and there were no major changes in text, the Barbados BIT, being the first BIT signed after May 1998, adopted this new model without seeking specific approval from the State Council. Had the Surinam BIT been signed as planned (in May 1998 during the visit to China of the President of Surinam), then the Barbados BIT would be only the second BIT adopting the new text. Indeed, MOFTEC and the MFA had been considering such a new generation of BITs since early 1990 after China ratified the ICSID Convention. In 1997, China’s State Council had approved some key changes that were included in the new text, in the course of China’s BIT talks (p. 41) with Canada. It can therefore be said that the breakthrough was actually achieved by the efforts of the Canadians in 1997, although the two parties did not manage to reach a formal agreement.
1.79 There were a number of reasons behind Chinese authorities’ willingness to adopt the new BIT regime in the 1990s. Within China, FDI had increased sharply since the early 1990s, particularly after Deng Xiaoping’s talks during the ‘South tour’ in 1992. Meanwhile, ODI from China to the rest of the world also surged. Beyond China, the world had experienced dramatic changes in the aftermath of the collapse of the Soviet Union: the former USSR states, the Eastern European states, and even the Latin American states had also adopted neo-liberalist investment policies, trying to bring their laws and treaty practice in line with international practice, in an effort to attract FDI. The competition for FDI from those countries had greatly intensified. Thus the Chinese authorities felt an urge to further liberalize the regime. On a technical level, the negotiation processes of BITs would be much simplified if a more liberal approach had been adopted on sticky points such as dispute settlement, national treatment and expropriation. Such technical convenience certainly provided an incentive for the relevant departments in China to accept or push for a more liberal BIT regime. All these elements cumulated in the 1990s and until a breakthrough was finally achieved in the course of the bilateral talks with Canada in 1997.
1.80 Since the Barbados BIT, China has entered into forty-four BITs (twelve of which are re-negotiations). Most of these BITs followed the new prototype and included full access to ICSID jurisdiction (Table 1.1). However, this does not mean that there have been no exceptions. The Qatar BIT signed in April 1999, for example, contains an investor–state dispute-resolution provision similar to the first-generation BITs: it provides only access to ad hoc arbitration for AOC disputes and no access to ICSID at all!192
South Africa BIT
30 Dec 1997
20 Jul 1998
17 June 1999
Congo (DR) BIT
20 Mar 2000
12 Jun 2000
22 Jun 2000
17 Nov 2000
15 Jan 2001
Sierra Leone BIT
16 May 2001
10 Jul 2001
16 Jul 2001
Nigeria BIT (2001)
27 Aug 2001
1 Nov 2001
Netherlands BIT (2001)
26 Nov 2001
12 Dec 2001
Bosnia Herzegovina BIT
26 Jun 2002
Trinidad and Tobago BIT
22 Jul 2002
Cote d’Ivoire BIT
30 Sep 2002
27 Mar 2003
18 Aug 2003
Germany BIT (new)
1 Dec 2003
18 Feb 2004
15 Apr 2004
27 May 2004
21 Jun 2004
Sweden BIT (Protocol)
27 Sep 2004
Finland BIT (2005)
15 Nov 2004
22 Mar 2005
10 June 2005
Spain BIT (2005)
14 Nov 2005
Czech BIT (2005)
8 Dec 2005
Portugal BIT (2005)
9 Dec 2005
5 Apr 2006
9 Nov 2006
21 Nov 2006
10 Feb 2007
Romania Protocol 2007
16 April 2007
Cuba Protocol 2007
20 April 2007
7 Sept 2007
24 Oct 2007
11 July 2008
Pakistan FTA Chapter 9
24 Nov 2006
New Zealand FTA Chapter 11
7 April 2008
(p. 43) 1.81 This brief overview of the historic development of the Chinese BIT programme suggests that China has been, over the last two decades, liberalizing its BIT regime. However, it is difficult to predict whether such a trend will continue. Conflicting views have emerged with regard to the future of the Chinese BIT programme. On the one hand, the relevant governmental departments appear to be willing to further liberalize the regime, given the rapidly increasing outward investment from China to the rest of the world.193 On the other hand, academics seem to be urging caution and a more conservative stance.194 Many have voiced strong criticism of the current liberalization trend and practice, pointing to the traumatic experience of Argentina as a stark warning of the potential risks of adopting such expansive BITs.195
1.82 As a result, the relevant governmental departments are reassessing the situation and rethinking the future direction of China’s BIT programme. The negotiations with North American states, particularly the US and Canada, will prove critical in identifying future trends in China’s BIT policy. However, given that China has adopted a liberal route in the last few years and considering its fast growing outward investment (in particular in the areas of natural resources and infrastructure) it would seem more realistic to expect China to carry on with the liberal trend rather than reverting to a more conservative approach.196
Chinese BITs: Key Features of the Current Model
1.83 The current Chinese Model BIT has a Preamble and thirteen articles. This is a standard format when compared with European BITs such as the UK Model Text, which has fourteen articles. In contrast, however, it appears rather brief compared with the US Model BIT, which has thirty-seven articles and a few Appendices, or the Canadian Model with fifty-two articles and several Appendices. The Chinese prototype generally follows the shorter European model rather than the more prescriptive North American model.
• substantive articles on issues such as admission, standards of treatment, expropriation and compensation, compensation for damages and losses, transfers, subrogation
• settlement of interstate and investor–state disputes.
• umbrella clause and ‘preservation of rights’ clause, stipulated under the title of ‘Other obligations’ after the dispute-settlement clauses
1.85 Five key features may be observed from the current Model BIT. These features can be regarded as the ‘Chinese characteristics’ of the Chinese BIT programme. The following briefly examines these features.
1.86 First, with regard to the scope of the definition of ‘investment’, the Model BIT links it to the way in which an investment is made. Therefore, only assets ‘invested by investors of one Contracting Party in accordance with the laws and regulations of the other Contracting Party in the territory of the latter’ are considered to be investments covered under the treaty and protected by its terms.197 This is particularly important given that China adheres to a systematic ‘one by one’ approval system on foreign investment admission.198 In other words, any investments that are not properly approved by the Government would not qualify as an ‘investment’ and therefore could not rely on the BIT protections. The Germany BIT of 2003 removed this ‘subject to local law’ requirement in the definition of ‘investment’.199 However, in the article on admission of investments the treaty provides that each contracting party is required only to ‘admit such investment in accordance with its laws and regulations’.200 Even in this third-generation BIT the ‘subject to local law’ requirement has been permitted through the back door.
1.87 Second, on the issue of treatment standards, whilst the new Model BIT grants national treatment and non-discriminatory treatment to foreign investment, such treatments are still subject to the laws and regulations of the host state. This is largely due to the fact that national treatment cannot be implemented unless there is a market economy.201 China has a planned economy legacy and is still only (p. 45) working its way towards establishing a full market economy.202 It is important to remember that in the earliest Model BIT, China did not include national treatment at all. The BIT with the UK signed in 1986 was the first BIT where this standard of treatment was included and even then it was only a ‘best endeavour’ clause requiring the contracting parties to implement it ‘to the extent possible’.203 The BIT with Japan in 1988 was the second example and its national treatment clause was also substantially qualified by subjecting it to ‘the sound development of economy’.204 More recent BITs, however, have moved a step further from the current prototype. The Germany BIT, for example, has removed the ‘subject to local laws’ limitation in its national treatment clause, but replaced it with a ‘grandfather clause’ for China in its Protocol.205 This provision allows for the continuation of existing non-conforming Chinese measures that are incompatible with the national treatment standard.206 A similar change was also made to the non-discrimination treatment standard.207
1.88 Third, with regard to the standard of compensation for expropriation, the Chinese Model BIT does not include a direct reference to the ‘Hull Formula’ of ‘adequate, prompt, and effective’ compensation. Nevertheless, it accepts that the compensation shall be ‘equivalent to the value of the expropriated investments’ and shall be made ‘without delay, be effectively realizable and freely transferable’.208
1.89 Fourth, on the question of transfers, the current Model BIT subjects free transfers of investments to the host state’s ‘laws and regulations’.209 This is necessary as China still implements an exchange control policy, particularly on capital account, and its currency, the RMB, is not yet freely convertible. This rule has been further liberalized in recent BIT practice. Again, taking the Germany BIT as an example, it lifted the ‘subject to its laws and regulation’ limitation on transfers.210 It was replaced in the Protocol by merely subjecting transfer of proceeds to relevant ‘formalities stipulated by the present Chinese laws and regulations’ on exchange control and requiring loan agreements to be registered with the relevant authority.211 These provisions relating to free transfers may ultimately be abandoned altogether as China further liberalizes its foreign exchange control regime.212
(p. 46) 1.90 Fifth, relating to investor–state dispute resolution, the current Model BIT contains a ‘fork in the road’ clause requiring aggrieved parties to choose either a local court or ICSID arbitration to resolve the dispute where the matter cannot be settled within six months.213 Where ICSID arbitration is chosen, the state party may require the investor to go through the domestic administrative review procedures before resorting to ICSID.214 It is noted that the ‘fork-in-road’ clause has been substantially watered down in some of China’s more recent BITs, eg the Germany BIT stipulates that a disputing party may withdraw a dispute from a domestic court and submit it to international arbitration.215 This BIT also makes it clear that the domestic review procedure requirement is a mandatory condition before German investors can resort to ICSID but that the maximum time allowed for such procedures is three months.216 As mentioned above, earlier versions of the Chinese Model BIT only allowed for access to ad hoc arbitration, not ICSID arbitration, as China only ratified the ICSID Convention in 1993. From then China started to accept ICSID arbitration for AOC disputes. It did not accept submission of non-AOC disputes to the ICSID until 20 July 1998 when the Barbados BIT was signed. Both the Germany BIT and the Barbados BIT, together with a few other third-generation BITs, have now entered into force, eliminating the restrictive notification made at the time of ratification of ICSID at least for investors and investments protected by those treaties.217
Chinese BITs: Status within the Chinese Legal System
If an international treaty concluded or acceded to by the PRC contains provisions differing from those in the civil laws of the PRC, the provisions of the international treaty shall apply, unless the provisions are ones on which the PRC has made reservations thereon.219
When domestic legislation or internal regulations are in conflict with obligations undertaken by China under an international treaty, rules of the international treaty shall be applied. Provisions of domestic legislation shall not be invoked as justification for the refusal to perform the obligations undertaken by China under the international treaty.
1.93 These provisions have been cited as evidence that China has already generally accepted the superiority of treaties over all municipal laws and regulations.221 However, most Chinese international lawyers, including Judge Wang Tieya, believe that such provisions are merely an expression of China’s willingness to accept the superiority of treaties within the legal hierarchy in specific areas, such as foreign-related civil and commercial matters, rather than over Chinese law in its entirety.222
1.94 Some Chinese scholars link the legal effects of international agreements to the level of authorities that ratify such agreements.223 Thus treaties ratified by the Standing Committee of the National People’s Congress (NPCSC) would be equivalent to ordinary ‘laws’ (Falu) in the Chinese legal hierarchy. Those ratified by the State Council would accordingly be equivalent to ‘administrative regulations’ (xinzheng fagui), whilst those that do not require ratification would be equivalent to ‘departmental regulations’ (bumen guizhang).224 Such a mechanical (p. 48) approach, however, might prove to be problematic in implementation225 and has been rejected by some eminent scholars.226 As a result it is unclear whether international treaties have direct effect and take precedence over domestic law and whether they have direct effect, in the absence of further constitutional clarification.227
1.95 Whether the Chinese investment treaties, particularly the BITs, override domestic law is open to debate. As a matter of fact, all major Chinese laws and regulations on foreign trade and FDI do not mention the status of international treaties vis-à-vis domestic law. Scholarly debate about the application of the WTO Agreement in China suggests that certain issues in the WTO Agreement relating to tariffs, anti-dumping, market access of financial services, and trade-related investment measures are not subject to the principle of the superiority of international treaties over national law.228
1.96 The situation has been helped by a recent regulation stipulated by the Supreme People’s Court (SPC), The Provisions on Some Issues on the Adjudication of Administrative Cases Concerning International Trade of 29 August 2002. The regulation provides that when adjudicating administrative cases involving international trade, Chinese courts should apply only Chinese national and local laws and regulations.229 The authority’s explanation of the regulation clarifies that it also applies to international investment administrative cases.230 It is therefore clear that, at least from a judicial point of view, international trade and investment agreements to which China is a party must be transformed into Chinese law before they can be applied and implemented. Nonetheless, the regulation also requires that the domestic laws and regulations implementing international trade and investment treaties should be interpreted in a manner consistent with (p. 49) international treaties if there is more than one interpretation of any specific provision of those domestic laws and regulations.231
Chinese BITs: Purposes and Interpretation
…Intending to create favourable conditions for investments by investors of one Contracting Party in the territory of the other Contracting Party;
Recognizing that the reciprocal encouragement, promotion and protection of such investments will be conducive to stimulating business initiative of the investors and will increase prosperity in both States;
Desiring to intensify the economic cooperation of both States on the basis of equality and mutual benefits…
1.98 In other words, Chinese BITs normally include three principles in the preamble, namely to (i) facilitate and attract investment; (ii) contribute to the prosperity of both contracting states; and (iii) cooperate on the basis of equality and mutual benefits. Thus, it can be said that although the primary purpose of the BIT is to facilitate and attract FDI, it is also essential that such investment shall be beneficial to the host country.234 This can be seen from elements of the last two principles, namely the need to contribute to the prosperity of both states and (p. 50) the principle of equality and mutual benefit. Thus a one-sided ‘pro-investor’ presumption in BIT interpretation in cases of doubt or ambiguity should generally be rejected.235
1.99 Although the Model BITs have remained unchanged, some of China’s early BITs have simpler provisions in the preamble. The 1982 Sweden BIT, the very first Chinese BIT, has only one sentence stating that the aim of the BIT is to ‘maintain fair and equitable treatment for investments’.236 The second BIT entered into by China, the 1983 Germany BIT, also had a very short preamble of only one sentence. It was, however, the first treaty that introduced a clear ‘pro-investor’ purpose for the BIT. The signature of that BIT was based on the parties’ desire ‘to develop economic cooperation between both states’ and ‘to create favourable conditions for investment’.237 The 1984 BLEU BIT seems to be the first BIT that embedded the current preamble prototype,238 which has been followed by the vast majority of Chinese BITs signed since then.
1.100 Some of the Chinese BITs, particularly the recent ones, have a more balanced approach in the preamble to investment protection and host-state interests. The preamble in the Australia BIT signed in 1988, for example, expressly recognizes that investment should be made in accordance with domestic laws and regulations of the host state, in addition to the aforementioned standard objectives, the wordings of which are slightly amended.239 The Sino–Nigeria BIT of 1997 also has a sentence in the preamble recognising that investors are obliged to respect (p. 51) the sovereignty and laws of the host state. This obligation was repeated in China’s BITs with Trinidad and Tobago (2002), Guyana (2003), and Benin (2004).240 These recent BITs with Trinidad and Tobago and Guyana have gone a step further in that their preambles include an ‘exception clause’. It acknowledges that the BITs’ objectives, namely the promotion and protection of investment, can be achieved without ‘relaxing health, safety and environmental measures of general application’.241 This should impact the interpretation by a future tribunal of the substantive clauses, in particular, fair and equitable treatment and expropriation. An expansive interpretation of those substantive protections to cover all measures regardless of their nature and public welfare effects is less likely where such provisions are included in the preamble. BIT provisions are interpreted by arbitral tribunals on a case-by-case basis so there may be variations. There is no principle of precedent between tribunals, although it has been acknowledged by several tribunals that the findings in earlier awards can be relied on if found to be relevant and persuasive in the case being decided.
1.101 This book attempts to provide a comprehensive commentary on Chinese investment treaties: their initiation and evolution, their underlying policies, and their implementation practices. It can be roughly divided into three parts. The first part, which is the above introductory chapter, explores and elaborates the Chinese BIT programme as a whole, putting the topic in historic context to better understand China’s recent changes in her approach to BITs.
1.102 The following part provides a detailed review and analysis of the key provisions of the BITs, such as fair and equitable treatment, non-discrimination treatment, monetary transfer, expropriation, and dispute settlement. This part starts by examining the scope of application of Chinese investment treaties, which includes the definitions of several crucial terms, as well as the application of such treaties, particularly to China’s Special Administrative Regions (SARs), such as Hong Kong and Macau. On each provision, examination is first given to the standard formulation in the Model BITs. Then any notable changes made thereto in the (p. 52) actual signed BITs are analysed. Each provision is assessed not only as it is in the Model and actual BITs but also as it is translated into the domestic laws and regulations of China and interpreted by domestic courts and international tribunals.
1.103 The last part, the concluding chapter, discusses the future agenda of China’s investment programme, in particular the outlook for a new Model Chinese BIT. It argues that it is time for China to adopt a new free-standing model BIT, which should aim at balancing the interests between the investors and the host state. The BIT therefore includes not only traditional BIT provisions such as treatment, expropriation, transfer, and dispute settlement, but also new provisions detailing the exceptions to such state obligations and imposing corporate social responsibilities. A complete model text is drafted and included in Appendix III. Brief comments have been made to the particular provisions in the new model BIT.
1.104 The book serves three main purposes. First, to analyse the policies underlying the BIT programme, which shall ultimately help in interpreting the BIT provisions. Second, to elaborate how the BIT provisions are actually transformed into domestic laws and regulations and how they are interpreted by judicial bodies such as courts and arbitration tribunals. It will thus provide practical guidance on the implementation and interpretation of such treaty provisions. Third, to evaluate the extent to which the negotiation processes of individual BITs resulted in substantial modifications of the Model BIT provisions and thus a departure from the original intent of the treaty drafters. It will put these changes into historical perspective and analyse their implications for current and future investors in China. Finally, to explore and propose a new Model BIT, on the basis of a comprehensive study of existing investment treaties. As China is actively considering a new Model BIT, it is hoped that this model text and the accompanying commentary may aid treaty drafters and negotiators in their treaty-making practice.
1 For details of China’s position in the world’s FDI recipients league table, see UNCTAD, World Investment Report series (since 1991), available at <http://www.unctad.org/Templates/Page.asp?intItemID=1485&lang=1> (last visited on 2 February 2008).
2 UNCTAD reported that China attracted a record $53 billion of FDI in the year and ‘became the world’s biggest host country’. However, UNCTAD also noted that ‘for special reasons’ Luxembourg actually headed both the FDI inflows and outflows league tables. See UNCTAD, World Investment Report 2003: Overview, 8.
3 This figure is calculated by the author on the basis of official statistics provided by the Chinese Ministry of Commerce, which is available at <http://www.fdi.gov.cn/pub/FDI_EN/Statistics/FDIStatistics/default.htm> (last visited on 2 February 2008).
4 UNCTAD statistics show that China was the 18th largest international investor in the world in 2006 with its $16 billion FDI outflow. See UNCTAD, World Investment Report 2007: Overview, at 2–3. According to the Chinese Minister of Commerce, Deming CHEN, China ranked the largest foreign investor among developing states and the 13th largest in the world in 2007, with about $20 billion FDI outflow. This marked a seven times surge in five years, from $2.5 billion in 2002. See MOFCOM: Chinese Enterprises Made $20 Billion Investment Abroad in 2007, posted at <http://www.fdi.gov.cn/pub/FDI/tzdt/dt/t20080122_89075.htm> (last visited on 5 February 2008).
5 Other factors in attracting FDI in China are believed to include, for example, the country’s large and continuously growing market, its export-oriented strategy and successful penetration of world markets, significant improvement of its macro-economic environment, the spill-over effects of industrial upgrading in neighbouring economies. See OECD Press Release: Reforms Could Boost China’s Ability to Attract Foreign Investment, posted at <http://www.oecd.org/document/8/0,2340,en_2649_37467_3240968_1_1_1_37467,00.html> (last visited on 2 February 2008); Ricupero, Rubens (then Secretary-General of UNCTAD), ‘Recent Development in FDI Trends and Policies and Their Implications for Developing Counties’, a paper submitted on the Forum on Direct Investment Strategies of the Multinational Corporations, September 1998, Xiamen, at 7.
8 Existing research on Chinese BITs is now rather outdated or incomprehensive. Shishi Li’s article on Chinese BITs published in 1989 was a first attempt to provide a general picture of Chinese BITs. However, it was based on only a few BITs then in force and was largely outdated in terms of contents. There have been a few articles dealing with limited number of BITs, such as Sornarajah’s writing on Chinese BITs with ASEAN countries and articles on BITs with the UK, Australia, and the proposed BIT with the US. The author’s research on the 22 BITs between China and EU member states, as part of a research on the legal framework governing EU–China investment relations, is probably the most ambitious research project conducted so far on Chinese BITs. Yet it is confined to a limited number of BITs with states from a particular, albeit important, part of the world. Some articles recently emerged on the new generation of Chinese BITs, which caught several of the features of some of the new BITs, but they failed to provide a thorough and in-depth understanding of Chinese BITs in general. See Shishi Li, ‘Bilateral Investment Promotion and Protection Agreements: Practice of the People’s Republic of China’, in International Law and Development 163 (Paul de Waart, Paul Peters, and Erik Denters eds., 1988); M Sornarajah, ‘Protection of Foreign investment in the Asian Pacific Economic Cooperation Region’, 29 Journal of World Trade, No 2 (1995); Q Kong, ‘Bilateral Investment Treaties: The Chinese Approach and Practice’, 8 Asian Y.B. Int’l L. 105 (1998–1999); L W Bates, ‘Protecting Foreign Investments in China: the Sino Japanese Bilateral Treaty: Comparison with Earlier BITs and U.S. Positions’, 10 East Asian Executive Report 9 (1988); J S Mo, ‘Some Aspects of the Australia China Investment Protection Treaty’, 25 Journal of World Trade Law 43 (1991); T A Steinert, ‘If the BIT Fits: The Proposed Bilateral Investment Treaty between the United States and the People’s Republic of China’, 2 Journal of Chinese Law (fall 1988); F A Mann, ‘British Treaties for the Promotion and Protection of Investments’, 52 British Yearbook of International Law (BYIL) 241 (1981). For more recent accounts see W Shan, The Legal Framework of EU–China Investment Relations – A Critical Appraisal (Hart Publishing, Oxford, 2005) (hereinafter Legal Framework); Wenhua Shan, ‘Towards a New Legal Framework for EU–China Investment Relations’, 35 Journal of World Trade (JWT) 5, 2000; Stephan W. Schill, ‘Tearing Down the Great Wall: The New Generation Investment Treaties of the People’s Republic of China’, 15 Cardozo J. Int’l & Comp. L. 73 (winter 2007).
9 This division of the stages of FDI development is slightly different from and probably more accurate than what the author has adopted in an earlier research (the research was focused on EU investment in China, but was also largely valid for foreign investment in China in general). For details of the relevant earlier research, See W Shan, Legal Framework, Introduction.
10 T N Thompson, China’s Nationalization of Foreign Firms: The politics of hostage capitalism, 1949–1957, University of Maryland Law School Occasional Papers/Reprints Series in Contemporary Asian Studies, (1979) No. 6 (27), 3.
12 It is observed that, through this approach, the government took numerous piecemeal actions over an extended period. Thus, it would intervene in foreign firms’ business operations by, for example, prohibiting transfer of funds out of China or the cancellation of agreements, and at the same time imposing price controls, tax increases, and wage increases. Eventually, foreign investors would lose control of their business and the investments would lose their value. Therefore, Thompson called it ‘hostage capitalism’ and Chew thought it constituted ‘massive creeping expropriation’, though the Chinese government said nothing about its nationalization programme for foreign enterprises, nor did it admit that nationalization had actually happened. PK Chew, ‘Political Risks and US Investment in China: Chimera of Protection and Predictability?’, Virginia Journal of International Law 4 (spring 1994). See also Thompson, above, n 10 at 67 and 68.
13 An example of such measures happened in May 1951 when China took over all of Shell Oil Co.’s installations in China, after the Hong Kong government took possession of an oil tanker, the ownership of which was disputed with China. Moreover, it has been noted that the outbreak of the Korean War in 1950 in particular accelerated the nationalization process, as the PRC government took radical economic measures against major western powers, in retaliation for measures which the latter had previously taken against the PRC. Thompson, above, n 10, at 68; Cohen, Jerome Alan and Chiu, Hungdah, People’s China and International Law (Princeton University Press, 1974), at 682.
14 It should be noted that there was certain FDI in China from states of the former Soviet Union Bloc during that period. For example, five joint ventures were set up in China in the early 1950s, with investments from the former Soviet Union and Poland. For details see Jingyong Lu, China’s Entry into WTO and Utilising Foreign Capital, Overseas Investment (Foreign Economic and Trade University Press, 2001), at 1–2.
17 Major relevant events include the ‘Great Leap Forward’ in 1958 and the ten-year ‘Cultural Revolution’ between 1966 and 1976. The Great Leap Forward campaign was a militant Five-Year Plan to promote technology and agricultural self-sufficiency which was held responsible for famine in 1960 and 1961 and resulted in Mao’s temporary withdrawal from the public scene. The Cultural Revolution was a ten-year political experiment aimed at rekindling revolutionary fervour and purifying the party, which caused huge social disorder. For more information about these campaigns, see the British Broadcasting Corporation (BBC): China’s Communist Revolution, posted at <http://news.bbc.co.uk/hi/english/static/special_report/1999/09/99/china_50/great.htm> (visited May 2008).
18 The decision was made during the Third Plenary Session of the 11th Central Committee of the Communist Party of China in 1978. See Y Wang, Investment in China: A question and answer guide on how to do business, (CITIC Publication House, 1997) at 1.
19 The theory of ‘socialism with Chinese characteristics’ aims to integrate ‘the universal truth of Marxism’ with ‘the concrete reality of China’. It was put forward by Deng Xiaoping in 1982 and has been established as the second historic leap in the process of combining Marxism with practice in China, following the realization of the first one after China found its path in the New Democratic Revolution. For further information about this theory, see Beijing Review, The Theory of Building Socialism with Chinese Characteristics, posted at http://www.bjreview.com.cn/2001/200126/CoverStory-200126(Background-3).htm (visited May 2008).
20 See BBC, China’s Communist Revolution, posted at http://news.bbc.co.uk/hi/english/static/special_report/1999/09/99/china_50/deng.htm (visited on 23 August 2008).
21 China entered into a bilateral investment guarantee agreement with the United States on 30 October 1980, which is sometimes regarded as the first bilateral investment agreement China has signed. However, the agreement concerns only investment insurance and guarantees and does not cover normal BIT issues such as standards of treatment and dispute settlement, and may not be regarded as a ‘proper’ BIT. See US and China Exchange of notes constituting an agreement relating to investment guarantees (with related notes and letter and statement dated 7 October 1980), Beijing 30 October 1980.
22 For a list of these laws and regulations, see Shan, Legal Framework, Chapter 1. For a list of the Law and regulations published by the, see Meizhen Yao, Textbook on Foreign Invested Enterprises Law (Law Press China, 1990, in Chinese), 27–33.
23 The MIGA Convention aims to promote investment flow from developed countries to developing countries by providing investment insurance against political risks. The ICSID Convention sets up a permanent arbitration mechanism to settle investor–state investment disputes. China was a founding member of the MIGA Convention from its entry into force in 1988. China also signed the ICSID Convention in 1990, which took effect on 1 January 1993.
24 Deng is also frequently quoted as saying: ‘[P]ractice of a planned economy is not equivalent to socialism because there is planning under capitalism too; practice of a market economy is not equivalent to capitalism because there are markets under socialism too.’ See ‘Deng Xiaoping: leading thinker in China’s market economy’, People’s Daily Online (24 August 2004), available at <http://english.peopledaily.com.cn/200408/12/eng20040812_152737.html> (last visited on 3 February 2008).
25 China started its market-oriented reform from 1978. However, the goal of the reform was not clarified until Deng’s southen tour in 1992. See ‘Deng Xiaoping: leading thinker in China’s market economy’, ibid.
26 See ‘China’s Constitution amendments to have far-reaching influence’, People’s Daily Online (28 December 2003), available at <http://english.peopledaily.com.cn/200312/28/eng20031228_131405.shtml> (last visited on 3 February 2008).
27 See ‘The Central Committee of the Chinese Communist Party (CCCPC) Decision on Some Issues Related to the Establishment of the Socialist Market Economy’, published on the People’s Daily, 7 November 1993, at 1.
29 See eg ‘FDI Increases after WTO Entry, Foreign Trade up’, China Daily (16 May 2002), available at <http://www1.china.org.cn/english/investment/32702.htm> (last visited on 3 February 2008).
30 Other WTO Agreements, such as the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPs) and the Agreement on Subsidies and Countervailing Measures (SCMs), are also of significance to investment. For further details on the relevance of WTO to investment see Shan, Legal Framework, Section 184.108.40.206.
31 China has, for example, revised almost all of its basic FDI laws and regulations, in order to make sure that they are in line with the WTO requirements. For details of some related changes, see eg W Shan, ‘Towards a Level playing Field for Foreign Investment in China’, The Journal of World Investment and Trade, Vol 3 No 2 (April 2002).
34 Catalogue for the Guidance of Foreign Investment Industries (Amended in 2007), Decree of the State Development and Reform Commission and the Ministry of Commerce of the People’s Republic of China, No. 57, 31 October 2007.
35 H Yuan, Authorities Interpret the 11th Foreign Investment Plan, China Investment (in Chinese), Part I, posted at <http://www.sina.com.cn> (last visited on 23 April 2008).
41 ibid, at 320–1.
43 This can be explained by the fact that most ODI enterprises from China were actually engaging in trading businesses. See also Cai, ibid.
44 Sufficient forex supply is one of the conditions for an effective ODI strategy. However, as shown in Figure 1.4, China’s cumulative forex reserve was $–1.29 billion in 1980 and did not achieve $100 billion until 1996.
45 As Figure 1.4 shows, China’s forex reserve increased sharply in the 1990s, from $10 billion in 1990 to nearly $140 billion in 1997, a growth of fourteen times in seven years. This obviously gave the Government confidence in making the ‘going abroad’ decision.
47 The Central Committee of the CPC, Decision on Some Issues concerning the Improvement of the Social Economy Market available at <http://news.xinhuanet.com/newscenter/2003-10/21/content_1135402.htm> (last visited 5 February 2008).
48 See the State Council, Decision of the State Council on Reforming the Investment System, Parts II and III, available at <http://news.xinhuanet.com/zhengfu/2004-07/26/content_1648074.htm> (last visited 5 February 2008).
51 It has been estimated by some economists that the optimal size of forex reserve in China should be $7000 billion. But China has gone well beyond this threshold since 2005 when its forex reserve reached $818 billion. A lively debate ensued as to how to deal with such a wealth of forex reserve. See e.g. Xia Bing, ‘The Best Scale of China’s Forex Reserve is $700 Billion’, posted at the People’s Daily Online (11 April 2006): <http://finance.people.com.cn/GB/8215/4287610.html> (last visitecd on 5 February 2008). See also Jiang Yong, ‘The Good and Bad Sides of the Forex Reserve’, People’s Daily Overseas Edition (7 April 2006), available at <http://news.people.com.cn/GB/37454/37459/4279478.html> (last visited on 5 February 2008).
53 China is now the No. 1 country in terms of forex reserve, which has outstripped the total forex reserve of the G7 countries combined. See ‘China’s Forex Reserve Overtakes the Total Amount of G7 Countries’, posted at <http://news.163.com/08/0603/02/4DFRH5E00001124J.html> (last visited on 22 August 2008).
54 China set up a forex investment corporation in September 2007 (The China Investment Corporation) to organize its investment activities. Relevant reports see Jzhao, ‘China Investment Ltd was formally established on 29 September 2007’, posted at <http://finance.sina.com.cn/roll/20070929/09571699771.shtml> (last visited on 5 February 2008). See also ‘China will establish a forex investment company under the direction of the State Council’, posted at the Zaobao.com: <http://realtime.zaobao.com/2007/03/070309_22.html> (last visited on 5 February 2008).
55 See Special Report in The Lawyer, 6 August 2007, Eastern Assist, where it was estimated that $11.7 billion had been invested by China in Sub-Saharan Africa. Much of the investment has been made into oil production in Angola, Chad, Nigeria, and the Sudan. CNOOC agreed to buy a 45% stake in South Atlantic Petroleum which holds a licence for an offshore oil field in the Niger Delta. See ‘Nigeria: China National Oil Invests N290b in Sapetro’, posted at <http://allafrica.com/stories/200709180854.html> (last visited on 23 August 2008).
56 China’s forex reserve reached $1.5 trillion by 2007, which accounts for about 13% of the world FDI stock (as it stood in 2006 it was $12.47 trillion). If a large part of the Chinese forex is used for ODI, it is bound to make a significant impact on international investment flow. As mentioned above, China has set up a forex investment company, the China Investment Ltd, to organize its investment activities. see Figure 1.4.
57 See ‘Invest in China’ (a MOFCOM website): <http://www.fdi.gov.cn/pub/FDI/zgjj/tzhj/wzzzg/default.htm> (last visited on 4 February 2008).
58 Other vehicles of foreign investment include, for example, compensation trade and export processing and assembly. ibid.
59 Source: FDI Statistics, Ministry of Commerce, China, available at <http://www.fdi.gov.cn/pub/FDI/wztj/lntjsj/wstzsj/2005nzgwztj/t20060906_61337.htm> (last visited on 18 February 2007).
60 In general, CJV is less regulated by the state and allows more flexibility for the partners in determining their JV relationship. For more, see Shan, ibid, pp. 39–41.
61 It also legally signalled China’s decision to embrace an ‘opening-up’ policy. The Law of Sino–Foreign Equity Joint Ventures (hereinafter referred to as ‘EJVL’) was adopted at the Second Session of the Fifth National People’s Congress on 1 July 1979.
62 The WFEL was adopted at the Fourth Session of the Sixth National People’s Congress, promulgated by Order No. 39 of the President of the People’s Republic of China, and took effect on 12 April 1986.
63 The Law of Sino-Foreign Joint Ventures (hereafter referred to as ‘CJVL’), adopted at the First Session of the Seventh National People’s Congress and promulgated by Order No. 4 of the President of the People’s Republic of China 13 April 1988, took effect on the same day.
65 For example, CJVL, EJVL, and their implementing regulations generally require the JV parties to submit both the ‘agreement’ and the ‘contract’ for approval. See Art 3, EJVL and Art 7 of the Implementation Regulations of the EJVL (promulgated on 20 September 1983, revised on 15 January 1986, 21 December 1987, and 22 July 2001 by the State Council), and Art 5, CJVL and Art 7 of the Implementation Regulations of the CJVL (approved by the State Council on 7 August 1995 and promulgated by the MOFCOM (then MOFTEC) on 4 September 1995).
(3) total amount of investment and registered capital of the joint venture, amount, proportion and forms of investment to be contributed by each party to the joint venture, the time limit for contributing investment, stipulations concerning incomplete contributions, and assignment of investments;
(5) the composition of the board of directors, the distribution of the number of directors, and the responsibilities, power, and means of employment of the general manager, deputy general manager, and senior managerial personnel;
See Art 11, the Implementing Regulations for the EJVL. The older Regulations required that EJV contracts should, in addition, stipulate ‘the ratio of products sold within Chinese territory to those sold abroad’ and ‘arrangements for receipts and expenditure in foreign currency’. Such requirements were removed in the 2001 amendment, to avoid potential violation of China’s commitments made towards members of the WTO. See Art 14, Implementing Regulations of the EJVL, promulgated by the State Council on 20 September 1983. The latest amendment took place on 22 July 2001 and was adopted by the State Council.
Similar provisions can be found in Art 12, the Implementing Regulations of the CJVL.
74 According to Art 3 of the previous Implementation Regulations of the WFEL (approved by the State Council on 28 October 1990, last revised on 12 April 2001), this means to ‘conserve energy and raw materials, and realize the upgrading of products and the replacement of old products with new ones, or the replacement of similar imports’.
75 It means that its annual output value of export products accounts for more than 50% of its annual output value of all products, thereby realizing the balance between revenues and expenditures in foreign exchange or with a surplus. Id.
76 WFEs are nevertheless encouraged to adopt high-tech and export goods abroad. For details of such amendment, see W Shan, ‘Towards a Level Playing Field for Foreign Investment in China’, 3(2) The Journal of World Investment at 334–6 (2002).
79 For instance, in the first eight months in 2002, there were 14 024 WFEs established in China, which accounted for 65% of total FIEs established in that period. See Yi Zhang, ‘China Attracted 34.4 Billion US Dollars of Realized Foreign Investment in the First 8 Months’, People’s Daily (overseas edition), 14 September 2002, at 1.
80 A 2005 MOFCOM survey among transnational corporations showed that, whilst 82% of them intended to expand their investment in China during 2005–2007, 57% of them planned to adopt the form of WFE. See ‘Whose Cheese Has Been Moved by the WFE Transformation of FIEs?’ (in Chinese) posted at <http://finance.sina.com.cn/review/20061128/09413115559.shtml> (last visited on 16 May 2008).
82 This Regulation was promulgated by the State Council on 30 January 1982 and entered into force on the same date. It was amended on 23 September 2001 by the State Council, to bring it in conformity with China’s WTO commitments.
83 REON was promulgated by the State Council Decree No. 131 on 7 October 1993 and entered into force on the same date. It was amended on 23 September 2001 by the State Council, to bring it in conformity with China’s WTO commitments.
84 In the REOFF, for example, some restrictive provisions, in particular relating to technology transfer, sales of production, purchase of raw materials, and employment, were deleted or amended. Meanwhile, the Guiding Catalogue of Industries for Foreign Investment adopted in 2002 lists exploration and exploitation of oil and gas and development of related new technologies as an area where foreigners are encouraged to invest.
85 Such laws include the Law of Mineral Resources (passed on 19 March 1986 by the NPCSC and entered into force on 1 October 1986, amended in 1996 and entered into force in 1 January 1997), Law on Marine Environmental Protection (passed on 23 August 1982 by the NPCSC and entered into force on 1 March 1983, amended on 25 December 1999, which entered into force on 1 April 2000), Regulations Concerning Environmental Protection in Offshore Oil Exploration and Exploitation (Promulgated by the State Council on 29 December 1983), etc. For a fuller list of such legislation, particularly that relating to joint exploitation of offshore oil resources, see K Zou, ‘China’s Governance over Offshore Oil and Gas Development and Management’, 35 Ocean Development & International Law 339, (2004) Table 2 p. 343.
86 It is interesting to note that, as Table 1 shows, the actual investment made in this form exceeded the contractual investment ($4.7 billion). This probably implies that foreign investors have made follow-up investments in addition to the original amount stipulated in the JE contract.
87 For a good introduction of the law of joint exploitation of onshore petroleum resources, see KM Wolf, ‘The Legal Framework for Joint Development of China’s Onshore Oil recourses: Negotiation Strategies and Future Prospects’, 9 Journal of Chinese Law 141–205.
92 Such a choice was made after a very careful study by the Chinese government. It is reported that, during 1978 and 1979, China sent delegations to various countries including the United States, the United Kingdom, France, Brazil, Norway, and Japan, and invited 23 foreign oil companies to China. Such a contractual arrangement was chosen after an analysis of more than 120 sample contracts and legal materials from 125 countries. See W Lai, ‘Launch Foreign Cooperation and Speed up Offshore Oil and Gas Development,’ China Institute for Marine Development Strategy (ed.), Law and Policy in Marine Affairs, Vol 2 (Beijing: Ocean Press, 1992, in Chinese), 160, as cited in K Zou, ‘China’s Governance over Offshore Oil and Gas Development and Management’, 35 Ocean Development & International Law 339 (2004), 349. See also J Yu, International Investment Law (Law Press China, 2003), 98.
94 The Implementing Regulations of the Law of Mineral Resources (promulgated by the State Council on 26 March 1994) define the right to explore mineral resources within the prescribed scope of the licence (contract), whereas the latter refers to the right to exploit and acquire mineral resources within the prescribed scope of the granted licence (contract). Such definition would be helpful in defining the two terms. See the Implementing Regulations of the Law of Mineral Resources, at 6.
97 See Jingsong YU, International Investment Law, 3rd edition, 2007, at 99. Gao noted that actually only three areas were open for negotiations: the work programme, the X factor (which determines the percentage of production a company receives as profit), and other contributions. See Zhiguo Gao, International Petroleum Contracts: Current Trends and New Directions (London: Graham & Trotman/Martinus Nijhoff, 1994), 157.
98 Details of approval can be found in the Rules on the Principles and Procedures Concerning the Approval of Foreign Investment Enterprises in Certain Industries, passed by the MOFTEC on 5 November 1996.
100 For example, in 1999 Russia adopted a new foreign investment law (No. 160-FZ, which became effective on July 14 1999), one of the few features of which is the tax stabilization clause stipulated in Art 9. For certain companies and projects, the article prohibits increases in the rates of certain import duties and federal taxes until initial investments have been recouped. See B Zimbler and K Arbatova, ‘Russia: The new Russian foreign investment law’, available at <http://www.iflr.com/?Page=10&PUBID=33&ISS=11977&SID=508948&TYPE=20> (last visited on 29 March 2007).
109 A typical definition of a BOT investment is as follows: ‘The BOT scheme is a contractual arrangement between the government and the private contractor. The contractor undertakes the construction and financing of an infrastructure facility for the government which the contractor shall operate and maintain for an agreed period of time. During the agreed period, the contractor shall be allowed to charge the facility users tolls, fees, and other charges to enable him to recover both his investment and operating expenses plus a reasonable rate of return. The facility is turned over to the government when the agreed period ends.’
A BOT project is different from a turn-key project, in that the contractor operates the facility in order to recover its costs and profit thereafter. See M Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer Law International, 2000), ch 2–2.7.
110 However, BOT is now also used in the offshoring and outsourcing of knowledge work. In these cases there is usually no government or public funding involved. Typically, a western customer contracts with an Indian or Chinese vendor and the vendor builds and operates a customer call centre or other business process for an extended period of time. However, the client retains the right to take over the operation (‘transfer’) at any time based on certain conditions and certain payments to the offshore partner. See Wikipedia: ‘Build-Operate-Transfer’, available at <http://en.wikipedia.org/wiki/Build-Operate-Transfer> (last visited on 26 February 2007).
111 There seem to have been different opinions on what was in fact the first BOT project. China’s Central Television reported that the Chengdu Water Plant was actually the first BOT project in China. However, Yu wrote that the first trial BOT project was the Guangxi Laiping Power Plant B, which was approved by the State Planning Authority. See China Central Television (CCTV), ‘The First BOT Water Project has Started to Provide Water’, posted at <http://www.cctv.com> (visited 20 August 2008), as cited in W Shan, Legal Framework, 43; J Yu, International Investment Law, 106.
112 For Chinese literature on BOT investment in China, see G Meng, ‘Legal Nature of the BOT Concession Agreements and the Legislative structure’, (Chinese) Journal of International Economic Law (Vol 13, No 3, 2006), 206–37; A Yu, Foreign Invested BOT Projects and Administrative Contract Law (Law Press China, 1998); C Sun and W Shen, ‘BOT Investment: the Legal Conflicts and Analysis’, Chinese Legal Science (Zhongguo Faxue, 1997), No 1; S Zhu and W Lin, ‘The Legal Nature of BOT Concession Agreements’, Chinese Legal Science (Zhongguo Faxue, 1999), No 4; Beijing Engineering Consultancy, Guidelines to BOT Projects (Dizhen Press, 1995); L Xie, ‘Government Intervention and the Legislation on BOT Concession Agreements’, Law Review (Faxue Pinglun, 1999), No 4.
113 This instrument was jointly adopted by the State Planning Commission (now the State Development and Reform Commission) and the State Administration of Foreign Exchange (SAFE) on 16 April 1997, which has details about the approval and financing of such projects.
114 However, it is observed that this legal framework is marred by incompleteness, relatively low ranking within the legal system, and inconsistency. It is incomplete because a range of important issues has not been covered, such as the nature of governmental guarantees, applicable law, and dispute settlement. Also, such legislation takes the form of departmental regulations (Bumen Guizhang), which rank very low in the Chinese hierarchy of legislation. Finally, some provisions are contradictory. For instance, the stipulations on governmental guarantees are different and conflicting between the two Notices, as observed below. See Meng, n 112 above, 223–4.
119 Worldwide, mergers and acquisitions occupy more than 70% of total flow of foreign direct investment. However, in China, it is estimated that by now less than 5% of FDI in China is realized by M&A. Nevertheless, it is anticipated that it will soon become the most popular mode of foreign investment in China. See F Wu and S Xu, ‘M&A is to Become the Major Form of FDI in Shanghai’; L Yan etc., ‘M&A Becomes Popular in China’, Q Yang, ‘Sharp Increase of Investment Opportunities in China for Transnationals’, in People’s Daily (overseas edition), 7 July 2003, at 2, 9 February 2002, at 5 and 24 May 2003, at 5 respectively.
120 The 2006 Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors, jointly promulgated by the MOFCOM, the State-Owned Assets Supervision and Administration Commission of the State Council, the State Tax Bureau, the State Industry and Commerce Bureau and China Securities Regulatory Commission, and the State Foreign Exchange Bureau on 8 August 2006, which entered into force on 8 September 2006 (the M&A Provisions). This new law replaced the Interim Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors, jointly promulgated by the MOFTEC (now MOFCOM), the State Tax Bureau, the State Industry and Commerce Bureau, and the State Foreign Exchange Bureau of January 2003, implemented since 12 April 2003.
124 ibid, Arts 4 and 9.
127 Yuan Hongming, Interpreting the New Revision of the FDI Catalogue, published in China Investment (in Chinese), posted at <http://www.sina.com.cn> (last visited on 24 April 2008).
132 Art 4, Provisions of Merger and Acquisition of Domestic Enterprises by Foreign Investors (published jointly by MOFCOM and six other ministries in August 2006, which entered into force on 8 September 2006).
133 This Catalogue was first published in June 2000 jointly by the former State Economic and Commerce Commission, the State Planning Commission, and MOFTEC. It revised in July 2004 by the SDRC, which entered into force on 1 September 2004.
135 OECD Press Release: ‘Reforms Could Boost China’s Ability to Attract Foreign Investment’, posted at <http://www.oecd.org/document/8/0,2340,en_2649_37467_3240968_1_1_1_37467,00.html> (visited 2 June 2008).
140 China has become active in regional economic cooperation in recent years, abandoning its previous reluctant attitude. It has signed the Asia-Pacific Trade Agreement (formerly the Bangkok Agreement, first concluded in 1975 under the auspices of the UN Asia Pacific Economic and Social Council. Now its members include China, India, Bangladesh, Laos, Korea, and Sri Lanka) and a framework agreement with the ASEAN with a view to establishing a free trade area by 2010. China also actively participates in APEC activities and in East Asia economic integration negotiations. For more on China’s regional economic cooperation activities, see MOFCOM, Regional Economic Cooperation, posted at <http://gjs.mofcom.gov.cn/af/af.html> (last visited on 8 February 2007).
141 A copy of the instrument can be found at <http://www.asianlii.org/apec/other/agrmt/anip355.txt/cgi-bin/download.cgi/download/apec/other/agrmt/anip355.pdf> (last visited on 8 February 2008).
142 China has signed and ratified eighty-six DTTs at the time of writing. For details of such agreements, see <http://www.chinatax.gov.cn/n480462/n480513/n481009/index.html> (last visited on 8 February 2008). For a comprehensive study on these DTTs, see Xin Zhang, Law and Practice of International Tax Treaties in China (Wildy, Simmonds and Hill Publishing, 2003).
143 Apart from the Asia Pacific Trade Agreement and the free trade arrangement with the ASEAN, China has signed FTAs with Pakistan (2006) and Chile (2005). Among them the Pakistan FTA is distinctive in that it contains an investment chapter, Chapter 9, which embraces typical BIT provisions such as treatment, expropriation, and state–investor dispute settlement. The Chile FTA does not have an investment chapter, but states in Art 120 that the two Governments will negotiate on investment, as well as trade in services. In the context, it can be noted that China has signed an agreement on trade in services with the ASEAN under the China–ASEAN free trade agreement framework. For details, see ‘MOFCOM, Regional Economic Cooperation’, posted at <http://gjs.mofcom.gov.cn/af/af.html> (last visited on 8 February 2008).
144 The New Zealand–China Free Trade Agreement, April 2008 at www.chinafta.govt.nz. This FTA includes sophisticated provisions on investment at Chapter 11. Section 1 sets out the substantive protections and Section 2 contains the dispute-resolution provisions.
146 More than 40% of the surveyed investors replied that in China law and policies are ‘always’, ‘mostly,’ or ‘frequently’ changed unexpectedly, while about half (49%) reported that unexpected changes of law are ‘sometimes’ experienced. Only 5% stated that they had ‘rarely’ encountered unexpected changes of law. See Wenhua Shan, Legal Framework, Chapter 8.
148 Foreign Economic Contract Law (adopted by the Tenth Meeting of the Standing Committee of the Sixth Session of the National People’s Congress on 21 March 1985 and entered into force on 1 July 1985), Art 40. This law was replaced by the Contract Law adopted on 15 March 1999 by the Second Meeting of the Ninth Session of the National People’s Congress, and entered into force on 1 October 1999), which has not maintained this provision.
149 ibid, Art 41.
150 The following provision from a contract for exploration in the Sichuan Basin is a good example: ‘If a material change occurs to the Contractor’s economic benefits after the effective date of the Contract due to the promulgation of new laws, decrees, rules and regulations or any amendment to the applicable laws, decrees, rules and regulations made by the Government of the People’s Republic of China, the Parties shall consult promptly and make necessary revisions and adjustments to the relevant provisions of the Contract in order to maintain the Contractor’s reasonable economic benefits hereunder.’
See Art 29(2), Contract for Exploration, Development and Production in Zitong Block, Sichuan Basin of the People’s Republic Of China between China National Petroleum Corporation and Pan-China Resources Ltd (Beijing, China, 19 September 2002), available at <http://contracts.onecle.com/ivanhoe/cnpc.zitong.2002.09.19.shtml> (last visited on 25 February 2007). See also M Yao, Textbook, 72 (noting that recent Chinese petroleum contracts contain such renegotiation and adjustment provisions).
‘Where any foreign invested enterprises which was established before the promulgation of this Law would, in accordance with the provisions of this Law, otherwise be subject to higher tax rates or enjoy less preferential treatment of tax exemption or reduction than that they were subject to before the entry into force of this Law, the law and relevant regulations of the State Council in effect before the entry into force of this Law shall continue to apply to such enterprises within its approved period of operation. If any such enterprises have no approved period of operation, such law and relevant regulations of the State Council in effect before the entry into force of this Law shall apply within the period prescribed by the State Council. Specific measures shall be drawn up by the State Council to implement this provision.’
See Income Tax Law of Foreign Invested Enterprises and Foreign Enterprises (adopted by the Fourth Meeting of the Seventh Session of the National People’s Congress on 9 April 1991), Art 27.
154 Art 57 of the new law has a similar provision as Art 27 of the Income Tax Law of Foreign Invested Enterprises and Foreign Enterprises. The new law was passed on 16 March 2007 by the 5th meeting of the 10th National People’s Congress and entered into force on 1 January 2008. For an introduction to the new law, see also Xinhua New Agency, ‘Enterprise Income Tax Law in Focus: A ‘Two-in-One’ Law for both Domestic and Foreign Invested Enterprise’ (24 December 2006, in Chinese, available at <http://news.xinhuanet.com/legal/2006-12/24/content_5526401.htm> (last visited on 26 February 2007).
156 An agreement was reached on 21 May 2008 and formally signed on 11 July 2008. See Xinhua: ‘Mexico, China to sign agreement promoting investments’, posted at: http://english.china.com/zh_cn/business/foreign_trade/11021616/20080521/14859162.html> (last visited on 3 June 2008); and Sina News: ‘President HU Jingtao Met Mexican President and Signed the Investment Protection Treaty, posted at <http://news.sina.com.cn/c/2008-07-11/160515916246.shtml> (last visited on 4 August 2008).
158 MOFCOM, ‘Top 15 Investors in China as of 2005’, posted at the MOFCOM website: <http://www.fdi.gov.cn/pub/FDI/wztj/lntjsj/wstzsj/2005nzgwztj/t20060906_61358.htm> (last visited on 9 February 2008).
159 Disagreement over the national treatment standard was a major stumbling block. See TA Steinert, If the BIT fits: the proposed bilateral investment treaty between the United States and the People’s Republic of China, Journal of Chinese Law, 1988, 405–57. For an early report, see CH Farnsworth, ‘U.S.–China Investment Talks’, The New York Times (26 May 1983), posted at <http://query.nytimes.com/gst/fullpage.html?sec=technology&res=9D07EEDE1F38F935A15756C0A965948260> (last visited on 9 February 2008).
160 For a report on the China–Canada BIT negotiations, see Robert Wisner ‘Canada and India conclude investment treaty: Negotiations with China continue’, posted at <http://www.bilaterals.org/article.php3?id_article=9498> (last visited on 9 February 2008).
161 For the US position on the BIT discussions, see US Department of the Treasury: U.S. Fact Sheet: The Third Cabinet-Level Meeting of the U.S.-China Strategic Economic Dialogue (December 13, 2007, Beijing). Available at <http://www.ustreas.gov/press/releases/hp733.htm> (last visited on 9 February 2008).
162 Law on the Procedure of the Conclusion of Treaties (adopted at the seventeenth Meeting of the Standing Committee of the Seventh National People’s Congress on 28 December 1990, promulgated by Order No. 37 of the President of the People’s Republic of China on 28 December 1990, and effective as of the same date).
166 ibid, at 165.
167 This article reads: ‘All foreign enterprises and other foreign investment located in China, as well as joint ventures with Chinese and foreign investment located in China, shall abide by the law of the People’s Republic of China. Their lawful rights and interests are protected by the law of the People’s Republic of China.’ See Art 18, the 1982 Constitution of the People’s Republic of China (adopted on 4 December 1982 by the Fifth Session of the Fifth National People’s Congress).
168 Shishi Li, ibid.
170 Li has identified certain features in early Chinese BITs with developing states and socialist states, as compared with those with developed states. In particular, he noted that Chinese BITs with developing states were more focused on investment promotion and encouragement, more emphatic on state sovereignty and national jurisdiction, whilst allowing for flexibilities. See Shishi Li, n 8 above, at 177–80.
171 As Li noted, by the end of 1986, China received $6.6 billion FDI and $12 billion foreign loans, whilst she only made $0.23 billion ODI to the rest of the world. Li, ibid. Kong also noticed that the main purpose of the Chinese BITs then was to protect and promote FDI in China. See Q Kong, ‘Bilateral Investment Treaties: the Chinese Approach and Practice’, Asian Yearbook of International Law (2003), at 114.
172 A review of many of the BITs entered into by states in the 1970s and early 1980s reveals that often there was no investor–state dispute resolution option. See Volumes 1–IX, Oceana, Investment Treaties of the World (loose-leaf).
174 ibid, at 177–8.
175 ibid, at 178–9.
176 For further details, see Li, ibid, at 179–80.
177 Li, ibid, at 180.
178 ibid. See Art 4(3) of the earlier Romania BIT signed in 1983.
179 For a list of ICSID cases, visit the ICSID website: <http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=ListCasesn>. For a good general survey of recent investment arbitration cases and issues involved therein, see UNCTAD: ‘Investor-state dispute settlement and impact on investment rule-making’, posted at <http://www.unctad.org/en/docs/iteiia20073_en.pdf> (last visited on 10 February 2008).
181 For details of the different views, see Chen, ibid, at 25–41.
182 China’s reservation on the class of disputes to be submitted to the Centre states that: ‘[P]ursuant to Art 25(4) of the Convention, the Chinese Government would only consider submitting to the jurisdiction of the International Centre for Settlement of Investment Disputes disputes over compensation resulting from expropriation and nationalization.’ This reservation can be found at the Centre website: <http://icsid.worldbank.org/ICSID/FrontServlet> (last visited on 16 February 2008). Its implications are discussed below in Chapter 8.
186 Indeed, none of the three BITs China signed immediately following the Lithuania BIT made any reference to ICSID jurisdiction. See Uruguay BIT (December 1993), Art 9; Azerbaijan BIT, Art 9; and Ecuador BIT, Art 9. The three countries had all signed up to the ICSID Convention at the time of signing of their BITs with China. They signed the ICSID Convention in 1992, 1986, and 1992 respectively. For details of ICSID membership, see <http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=ContractingStates&ReqFrom=Main> (visited on 3 June 2008).
187 See Barbados BIT, Art 9. The South Africa BIT signed in December 1997 was the first BIT that accepted access of all investor–state disputes to international arbitration. However, it accepted only ad hoc arbitration for such disputes, not ICSID arbitration. See South Africa BIT, Art 9. It is noted that South Africa has not joined the ICSID Convention at the time of writing.
189 See ‘Request for Authorization Concerning the Negotiation and Signiture of Bilateral Investment Protection Treaties with Surinam and Other States’, jointly by the MOFTEC and MFA on 4 May 1998,  MOFTEC Law (Waijingmaofafa) No. 290, which is on file with the Authors.
192 This omission of ICSID jurisdiction may be explained by the fact that Qatar has not yet become a Member State of the ICSID Convention. Perhaps they did not want to include a conditional consent to ICSID that could be perfected later (see for e.g. AdT v Bolivia ICSID Case No. ARB/02/3 Jurisdiction Decision 21 October 2005). It is interesting that the BIT provides in the event of the parties’ default in appointing the tribunal the Secretary-General of ICSID can do so. Clearly, the parties considered ICSID during negotiations. However, the fact that it does not permit non-AOC disputes to access international arbitration in general shows that it is as restrictive as first-generation BITs. In fact, as early as 1997, China accepted full access to ad hoc international arbitration for all investment disputes, when the South Africa BIT was signed. See Qatar BIT, Art 9 and South Africa BIT, Art 9, respectively.
193 Interviews with MOFCOM DG Treaty and Law officers show that they tend to be proactive in continuing to sign liberal investment treaties. This appears to be consistent with the recent signature of the New Zealand FTA of April 2008 and the BIT with Mexico of July 2008.
194 Many such views have been expressed in the book entitled New Developments in International Investment Law and New Practice of Bilateral Investment Treaties in China (A Chen ed., in Chinese), Fudan University Press 2007.
196 It is noted that many other states are reconsidering their BIT programmes. Venezuela, for example, has notified the Netherlands that it will terminate the BIT. Ecuador has also indicated the same intention on BITs with the US and some other states. Bolivia, meanwhile, notified ICSID that it had decided to withdraw from the ICSID Convention. There is indeed a growing shift away from the more neo-liberalist BIT approach, and the Calvo approach, as embedded in traditional Chinese BITs, seems to be in vogue! For further details of the rise of Calvo Doctrine and the decline of the neo-liberalist approach, see Wenhua Shan, ‘From North-South Divide to Private-Public Debate: Revival of the Calvo Doctrine and the Changing Landscape in International Investment Law’, 27 Northwestern Journal of International Law and Business at 631–64.
200 ibid, Art 2(1).
209 ibid, Art 6.
217 Whether or not such protection could be extended to other states that have only a first- or second-generation BIT with China, by the operation of the MFN clause, is a matter of controversy, which will be discussed in Chapter 8 on dispute resolution.
220 H Chen, W Zhou, and H Jiang, ‘The Relationship between International Treaties and Municipal Law and the Practices of China’, Tribune of Political Science and Law (Zhengfa Luntan) (2000), No 2, at 122; Judge Wang, International Law (Law Press China 1995, in Chinese), at 33.
224 According to the Chinese Law of Legislation, the Chinese legal hierarchy goes as follows, from top to bottom: Constitution, Basic Laws (both are passed by the NPC itself), Laws (by the NPCSC), Administrative Regulations (by the State Council), Departmental Regulations (by departments of the State Council). See Chinese Law of Legislation (passed by the Third Meeting of the Ninth Session of the NPC on 15 March 2000 and entered into force on 1 July 2000), Arts 7, 56, and 71. According to the Chinese law on treaty-making procedures, only important agreements are ratified by the NPCSC. Other international agreements are either ratified by the State Council, or are those that do not require ratification. See the Treaty Making Procedural Law of the People’s Republic of China (passed by the Seventh Session of the NPCSC in its Seventeenth Meeting on 28 December 1990, entered into force on the same date), Arts 7–10.
225 One obvious problem would be that some of China’s basic FDI laws, such as the EJVL, were actually promulgated by the NPC, which means that they would prevail over BITs in cases of conflict since BITs are ratified either by the NPCSC or, in most cases, the State Council and therefore are of lower legal status. This does not appear to conform to the general Chinese attitude towards international agreements, as demonstrated in the above mentioned domestic legislation.
226 Professor Nanlai Liu from the Chinese Academy of Social Sciences, for example, criticized this approach and pointed out the problems it resulted in. See Nanlai Liu, The Application of Treaties in Domestic Law and the Legal Construction of China, in Xiaoqing Zhu and Lie Huang eds., The Relations between International Treaties and Domestic Law (World Knowledge Press 2000, in Chinese), at 145.
227 It has been argued that, given that the right to interpret rules on applicable laws rests in the hands of the Standing Committee of the National People’s Congress, the general binding effect of the Regulations is debatable. See He, supra, n 221.
232 This is natural as the Vienna Convention of the Law of Treaties, widely viewed as a codification of customary international law on treaty interpretation, requires that: ‘A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.’ See Vienna Convention on the Law of Treaties, Art 31(1).
234 This emphasis on balancing the interests of the investor with those of the host state was also included in the draft Model BIT issued by Norway. Investors’ rights are protected whilst recognizing the legitimate interest of the host state to regulate health safety, environmental protections, and labour rights. Preamble at www.regjeringen.no/upload/NHD/Vedlegg/hoeringer/Utkast%20til%20modellavtale2.doc.
235 Such ‘pro-investor’ presumption is not rare in investment treaty arbitration awards and scholarly writings. Dolzer and Stevens, for example, indicate in their celebrated book Bilateral Investment Treaties that, ‘[S]ince most of the substantive provisions of the BIT concern the promotion and protection of foreign investment, it could be argued that any ambiguity should be interpreted in a way that would favour the right granted to a foreign investor’. See R Dolzer and M Stevens, Bilateral Investment Treaties, at 17. An example of arbitration award on this point can be found in the SGS v Philippines case, in which the arbitral tribunal held: ‘116. The object and purpose of the BIT supports an effective interpretation of Art X(2). The BIT is a treaty for the promotion and reciprocal protection of investments. According to the preamble it is intended ‘to create and maintain favourable conditions for investments by investors of one Contracting Party in the territory of the other’. It is legitimate to resolve uncertainties in its interpretation so as to favour the protection of covered investments.’ See SGS v Philippines, ICSID Case No. ARB/02/6, para 116.
239 The Australia BIT Preamble states that contracting parties signed the treaty,‘RECOGNISING the importance of promoting the flow of capital for economic activity and development and aware of its role in expanding economic relations and technical Cooperation between them, particularly with respect to investment by nationals of one Contracting Party in the territory of the other Contracting Party;
CONSIDERING that investment relations should be promoted and economic Cooperation strengthened in accordance with the internationally accepted principles of mutual respect for sovereignty, equality, mutual benefit, non-discrimination and mutual confidence;
ACKNOWLEDGING that investments of nationals of one Contracting Party in the territory of the other Contracting Party would be made within the framework of laws of that other Contracting Party; and
RECOGNISING that pursuit of these objectives would be facilitated by a clear statement of principles relating to the protection of investments and associated activities, combined with rules designed to render more effective the application of these principles within the territories of the Contracting Parties…’