Dacheng Law | 17 December 2012

Chinese practice of foreign investment protection: Bilateral Investment Treaties (BITs)

Article by Samuel Rongqing Jiang

Due to the dispute over sovereignty of the Diaoyu Islands between China and Japan, large-scale anti-Japanese demonstrations occurred in several Chinese cities around Sep 18, 2012. According to the Japanese government’s preliminary assessment, Japanese enterprises in China have lost about $125 million because of the demonstrations. The Japanese government also claimed that the loss of Japanese investment should be compensated under Chinese domestic law, which we assumed to be the last resort that the Japanese government made after a careful study of the Bilateral Investment Treaty (BIT) between China and Japan.

According to the Sino-Japanese BIT, (1) the Chinese government shall accord Japanese investors with treatment no less favorable than that accorded to domestic nationals and companies, except for differential treatment for the purpose of maintaining public order, national security or sound development of national economy. Therefore, the Chinese government can compensate for the loss of domestic investors, and not give the same compensation to Japanese investors according to this exclusion clause; and (2) Japanese investors’ property and interests shall be accorded treatment no less favorable than that accorded to nationals and companies of any third country. Japanese investors may claim that the Chinese government did not provide treatment as favorable as that offered to investors from other countries and thus claim for redress. However, according to the Sino-Japanese BIT, Japanese investors can not submit the dispute to international arbitration tribunals without the Chinese government’s agreement. The Japanese government may try to quicken the BIT signed this year among China, Japan and Korea into force as soon as possible, which provided that disputes between investor and the host country can be submitted to international arbitration tribunal without the other party’s agreement.

We need to point out that China has entered into BITs with more than 130 countries, which will provide more protection and choices for foreign investors.

– In BITs, the Chinese government promised that foreign investment can be accepted and protected according to Chinese laws, and can receive fair and equitable treatment, most favored nation (MFN) treatment and/or national treatment. Therefore, when a foreign investor’s request is rejected illegally by Chinese investment authorities (e.g. Ministry of Commerce), or the case involving foreign investment is procedurally unfair or materially unfair in Chinese judicial system (e.g. courts), the foreign investor can claim for compensation under BITs. For example, trial of second instance of Gansu High Court upheld the verdict that the valuation adjustment agreement in private equity investment was invalid, which was apparently contrary to the commitment of the Chinese government in BITs and the investor’s reasonable expectations. If the private equity funds investor is a foreigner, he should consider the BIT between his home country and China to protect his own rights and interests.
– In BITs, the Chinese government promised that the expropriation or nationalization of foreign investment for the purpose of public interest should be carried out in accordance with legal procedure and that foreign investors can gain reasonable, prompt and adequate compensation. Therefore, recently in the field of the real estate market rectification and economic structure adjustment, foreign investors whose land being confiscated or project being cancelled, can claim for redress based on BITs. So far, the only international arbitrational claim against Chinese government based on BITs (registered in ICSID on May 24, 2011) arose after the expropriation of the foreign investor’s project in Hainan by the government of Hainan province.
– In addition, the investment and investor definition clause, compensation and exchange restriction clause, host country default clause, right of subrogation, dispute resolution and protection period clause are also particularly important to protect foreign investors. Foreign investors should estimate the treatment, fairness, damage, nationalization and expropriation, exchange restriction, relief method when the host country defaults under BITs at the risk evaluation stage of a new investment in China, instead of paying attention to BITs until rights are infringed. Foreign investors can also establish their investment framework to better prevent abovementioned risks through careful study of BITs.

Four international arbitrations involving Chinese corporations and Chinese government have been registered. ICSID arbitration mentioned above was raised against Chinese government. The other three arbitrations were raised by Chinese nationals or corporations against host states, namely Hong Kong ’Mr Tza vs. Peru, 2009, four Chinese corporations vs. Mongolia, 2011, and China Ping An Insurance vs. Belgian, 2012. Based on the experience in the above cases, we observe that as to the outbound FDI, the Chinese government would actively encourage Chinese corporations to take advantage of BITs to protect their investment, while as to the inbound FDI, it will regard out-of-court settlement as the first choice of dispute resolution when being the respondent. For that matter, the Chinese government’s attitude is no doubt more beneficial to foreign investors.