In this blog, we address the question of whether Chinese international investment agreements strike a fair balance between the rights of investors and the regulatory powers of the state hosting the investment. We investigate the arbitration experience and drafting of expropriation clauses under Chinese International Investment Agreements (IIA), to then ponder on how China, or contracting states to its BITs, try to prevent investors’ claims following regulations taken to protect public interest.
With the Covid-19 outbreak and national commitments to reach zero-net emissions by 2060,[1] states like China have, and will continue to, implement general regulations with the purpose to protect public health and the environment. These regulations may have the capacity to affect foreign investors’ rights and the value of their property in the host state. As a general principle of international investment law, any foreign investment that has been directly or indirectly expropriated shall be ‘promptly, adequately and effectively’ compensated.[2] Thus, scholars expect that regulations aiming at the protection of public health and the environment will likely give rise to compensation claims against states, for indirect expropriation as a result of legislative or executive laws or orders that have deprived foreign investors of their investment or the substantial value of their investment.
How do China’s International Investment Agreements (IIAs) protect measures taken in the public interest from claims of indirect expropriation? This blog post considers the state’s police powers expressed in Chinese investment treaties.[3] It argues that China has entered into a flexible policy and move to a fourth generation of treaty-making since 2008. In particular, we see different safeguards of the state’s police powers in the recent IIAs. However, the wording of the expropriation clause and of the state’s police powers tend to demonstrate that China is not fully imposing its conditions to the other contracting state.
To date, China has faced a mere three arbitral tribunal as a host state, settling with a Malaysian investor (2011),[4] winning a claim from a South Korean investor (2014)[5] and currently defending in a pending case against a German investor (2017). [6] As a home state, six claimants have relied on the Chinese investment treaties, one filing in 2007 and the five others since 2010.[7] The Chinese experience of international investment disputes is thus considered modest.
The scarce number of treaty-based claims against China or from Chinese Investors is due to the way in which treaties currently in force have been drafted. In fact, they explicitly narrow the consent to the jurisdiction of international arbitral tribunals. Only one out of the nine disputes brought under a Chinese Investment Treaty has been successful to the Investor, which is notable considering the current discourse, which argues arbitration usually favours the investor excessively.[8]
According to UNCTRAL, only one arbitration case under a Chinese Investment Treaty has been awarded in favour of the investor, which is no surprise considering that all cases were based on treaties signed in the 90s, except for two concluded in 2003 and 2005.[9]
Two cases brought by Chinese investors allege breaches of an expropriation clause for indirect expropriation.[10] Beijing Shougang v Mongolia could have become a landmark in the interpretation of indirect expropriation and police powers doctrine. However, the Tribunal recognised a lack of ratione materiae jurisdiction, as the treaty only allowed disputes involving the amount of compensation for expropriation and not the determination of expropriation by the arbitral tribunal.[11] On the contrary, in Tza Yap Shum v Peru, the Tribunal recognised the deference given to a State’s regulatory and administrative powers and noted the general rule that a State is not liable for any losses resulting from the good faith application of general taxes and regulations. However, the Tribunal also noted that this deference is bound by the principle of reasonableness and non-arbitrariness reflected in public international law, as well as Peruvian law and treaty practice. Thus, the Tribunal concluded to the existence of an arbitrary measure taken by the Host state, which breaches the requirement to a lawful expropriation.
China has become a key legal and economic player in international investment law.[12] It is now considered as an active shaper of “investment law-making and policy agenda-setting”.[13] To date, the People’s Republic is bound by 124 IIAs in force.[14] China is the state with second highest number of IIAs after Germany, and before Switzerland.[15] As for 2020, the country maintains its position as the second greatest importer and fourth greatest exporter of Foreign Direct Investment (FDI) in the world in 2020.[16]
Scholars have divided China’s policy of investment treaties into three generations of Bilateral Investment Treaty (BITs), to which this paper adds one:[17]
A majority of the Chinese Investment treaties in force stem from the first and second generations of IIAs concluded between 1982 and 1998 – only forty IIAs concluded after 1998 are now in force (out of 124). This is critical, since until the third generation, Chinese Investment treaties show a notable reluctance in consenting to the jurisdiction of arbitral tribunals.
The third generation has largely broadened the jurisdiction of arbitral tribunals and the rights that foreign property holders possess to sue the host state. However, it is the argument of the paper that, since 2008, the provisions added in order to secure the state’s regulatory space form a fourth generation of IIAs. This fourth generation follows the trend of the “new-generation of BITs” devised by many.[20]
Since 2012, the Chinese Investment treaties include, in all new agreements, an interpretative annex or a clause, which introduces a mitigated form of Police Powers. Looking closely at the drafting of the IIAs recently concluded by China with Colombia, Canada, Tanzania and Turkey, differences in their respective wording can be made out. These differences might indicate that China is accepting the terms of the other Party rather than imposing a model of its own.
These newly concluded Chinese international investment agreements have come to reflect a reaffirmation of national sovereignty over its resources and right to regulate. This stringent framework accompanies, nonetheless, a broadened consent to arbitration. The trend thus shows a ‘greenisation’ of Chinese BITs[21] that follows the inclusion of interpretative guidelines or obligations on indirect expropriation, following the early examples of the Canadian and US Model BITs of 2004.[22]
However, while the substantive change is important in regard of the expropriation clause, it appears evident that China did not impose this change, but merely followed the preferences of its contracting party. The clause, considered as a mitigated form of police powers, differs notably differs in the four treaties with Colombia, Canada, Uzbekistan and Tanzania.
In the Canada-China FTA, the police powers doctrine is integrated as an interpretative annex to the treaty.[23] The clause indicates clearly that:
“Except in rare circumstances, such as if a measure or series of measures is so severe in light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith, a non-discriminatory measure or series of measures of a Contracting Party that is designed and applied to protect the legitimate public objectives for the well-being of citizens, such as health, safety and the environment, does not constitute indirect expropriation.”
Thus, the police powers doctrine entails an exception. The latter is expressed in the terms “except in rare circumstances”. This means the threshold that needs to be met by the arbitrators to determine that a bona fide regulation amounted to expropriation and is not covered by police powers should follow a restrictive interpretation. In other words, the principle that a regulatory measure taken for a public interest does not amount to indirect expropriation applies in general; however, in rare circumstances, i.e., if the measure does clearly not meet low levels of reasonableness and proportionality, the measure will be considered as amounting to an expropriation.
Moreover, the China-Australia FTA, signed in 2012, expressly excludes non-discriminatory regulations from treaty protection: “Measures of a Party that are non-discriminatory and for the legitimate public welfare objectives of public health, safety, the environment, public morals or public order shall not be subject of a claim under this Section.”[24]
On the contrary, the China-Tanzania BIT includes a threshold of reasonableness and thus secures the ability of the State to regulate less strictly.[25] The Uzbekistan-China BIT includes a threshold in-between the two, reciprocating the reasonableness expression of the Tanzania-China BIT, but starting with “except in exceptional circumstances”, thus making the threshold one degree higher.[26]
The explicit differences found in the investment agreements signed since 2008 suggest that China is not imposing its terms or Model on its partner, but instead, as analysed by previous scholars, shows great flexibility and negotiating skill. One explanation is the diplomatic approach taken by China, perhaps considering investment treaties as a way to promote political ‘Guanxi‘[27] rather than effective tools of legal security.
China is a key importer and exporter of foreign direct investment and, as such, has become an important shaper of international investment law and arbitration. However, as exemplified with the integration of the Police Powers Doctrine in its treaties, China has not yet demonstrated its ability or willingness to shape the interpretation of treaties, nor its substance by developing their own model. China’s practice remains, thus, highly flexible compared to the stability in clauses imposed by Canada, the United States, and since recently, the European Union.
The paper thus affirms that, while China signs treaties incorporating a mitigated form of Police Powers Doctrine, the People’s Republic has not yet wholly taken side in the shaping of the regulatory space of states under International Investment Law. This, in turn, is perhaps due to the limited consent given under its older treaties and the very scarce amount of claims it has yet been confronted with.
[1] See Barbara Finamore, ‘What China’s plan for net-zero emissions by 2060 means for the climate’ (2020 The Guardian) <https://www.theguardian.com/commentisfree/2020/oct/05/china-plan-net-zero-emissions-2060-clean-technology> accessed on 14th December 2020; also, among five other States, Germany, the United Kingdom, and France have implemented the target of reaching zero-net emissions by 2050 in their domestic law, and others have proposed such legislation.
[2] August Reinisch, ‘The Rule of Law in International Investment Arbitration’ in Photini Pazartzis and Maria Gavounel (eds), Reconceptualising the Rule of Law in Global Governance, Ressources, Investment and Trade (Hart 2016) 291.
[3] Police Powers Doctrine (also ‘Doctrine’ or ‘Theory’), simply defined, states that a measure does not constitute indirect expropriation, and, accordingly, does not give rise to an obligation to compensate, if it is considered part of the State’s Police Powers. Even if the measure results in the loss of property or substantial deprivation of the value of the investment, the investor will not be granted compensation.12 It allows the State to regulate in specific fields, protected by its sovereign prerogatives. According to the Saluka award, “the principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are ‘commonly accepted as within the Police Powers of States’ forms part of customary international law today.” See Saluka Investments BV v Czech Republic (UNCITRAL) Partial Award 17 March 2006 262.
[4] Ekran Berhad v People's Republic of China (ICSID Case No. ARB/11/15).
[5] Ansung Housing Co Ltd v People's Republic of China (ICSID Case No. ARB/14/25).
[6] Hela Schwarz GmbH v People's Republic of China (ICSID Case No. ARB/17/19).
[7] Yap Shum v Republic of Peru (ICSID Case No. ARB/07/6); Beijing Shougang Mining Investment Company Ltd., China Heilongjiang International Economic & Technical Cooperative Corp, and Qinhuangdaoshi Qinlong International Industrial Co Ltd v Mongolia (PCA Case No. 2010-20); Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v Kingdom of Belgium (ICSID Case No. ARB/12/29); Beijing Urban Construction Group Co Ltd. v. Republic of Yemen (ICSID Case No. ARB/14/30) ; Sanum Investments Limited v Lao People’s Democratic Republic (II)(ICSID Case No. ADHOC/17/1) ; Jetion Solar Co Ltd and Wuxi T-Hertz Co Ltd v Hellenic Republic (2019).
[8] Yap Shum v Republic of Peru (ICSID Case No. ARB/07/6).
[9] Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v Kingdom of Belgium (ICSID Case No. ARB/12/29) based on a BIT from 2005; Hela Schwarz GmbH v People's Republic of China (ICSID Case No. ARB/17/19) based on a BIT from 2003.
[10] Beijing Shougang and others v Mongolia (PCA Case No. 2010-20) decided in favour of State, and Tza Yap Shum v Peru (ICSID Case No. ARB/07/6) decided in favour of investor.
[11] Beijing Shougang and others v Mongolia (PCA Case No. 2010-20) para 451.
[12] Vivienne Bath, ‘Chinese Investment and Approaches to International Investment Agreements’ in Fabio Morosini and Michelle Ratton Sanchez Badin, Reconceptualizing International Investment Law from the Global South (CUP 2017) 47.
[13] Julien Chaisse, China’s International Investment Strategy: Bilateral, Regional, and Global Law and Policy (OUP 2019) 1; see also Congyan Cai, ‘China-US BIT Negotiations and the Future of Investment Treaty Regime’ (2009) 12 JIEL 457.
[14] Muthucumaraswamy Sornarajah, ‘Chinese Investment Treaties in the Belt and Road Initiative Area’ (2020) 8 CJCL 55.
[15] Ibid.
[16] UNCTAD, World investment Report (2020).
[17] Norah Gallagher and Wenhua Shan, Chinese Investment Treaties: Policies and Practice (OUP 2009) 35-41.
[18] Vivienne Bath (n2), 47.
[19] Cai Congyan, ‘China-US BIT negotiation and the future of investment treaties regime: A grand bargain with multilateral implications’ (2009) 12 Journal of International Economic Law 02 457.
[20] Catherine Titi, ‘International Investment Law and the European Union: Towards a New Generation of International Investment Agreements’, European Journal of International Law 26 (3), 2015, 639
[21] Manjiao Chi, ‘The “Greenization” of Chinese BITs: An empirical Study of the Environmental Provisions in Chinese BITs and Its Implications for China’s Future BIT-making’ (2015) 18 JIEL 511.
[22] Marc Bungenberg, and Catherine Titi, ‘The Evolution of EU Investment Law and the Future of EU-China Investment Relations’ in Wenhua Shan and Jinyuan Su (eds), China and International Investment Law (Brill Nijhoff 2014) VII.
[23] Agreement Between the Government of Canada and the Government of the People's Republic of China for the Promotion and Reciprocal Protection of Investments, annex B.10 Expropriation: “The Contracting Parties confirm their shared understanding that: 3. Except in rare circumstances, such as if a measure or series of measures is so severe in light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith, a non-discriminatory measure or series of measures of a Contracting Party that is designed and applied to protect the legitimate public objectives for the well-being of citizens, such as health, safety and the environment, does not constitute indirect expropriation.”
[24] China-Australia Free Trade Agreement (Australia-China) (entered into force 20/12/2015) ATS 15, Art. 9, 11(4).
[25] Agreement Between the Government of the People’s Republic of China and the Government of the United Republic of Tanzania Concerning the Promotion and Reciprocal Protection of Investments, Article 6 Expropriation: “3. Except in rare circumstances, such as where the measures adopted substantially exceed the measures necessary for maintaining reasonable public welfare, legitimate regulatory measures adopted by one Contracting Party for the purpose of protecting public health, safety and the environment, and that are for the public welfare and are non-discriminatory, do not constitute indirect expropriation.”
[26] Agreement Between the Government of the People's Republic of China and the Government of the Republic of Uzbekistan on the Promotion and Protection of Investments, Article 6: “3. Except in exceptional circumstances, such as the measures adopted severely surpassing the necessity of maintaining corresponding reasonable public welfare, non-discriminatory regulatory measures adopted by one Contracting Party for the purpose of legitimate public welfare, such as public health, safety and environment, do not constitute indirect expropriation.”
[27] According to the Oxford Dictionary: “(in China) the system of social networks and the relationships between people that are helpful and useful in business”; For a research on the role of Guanxi in the adoption of commercial arbitration and its relationship with FDI in China see Scott Wilson, ‘Law Guanxi: MNCs, state actors, and legal reform in China’ (2008) 17 Journal of Contemporary China 54 25.