Investment Treaties and Their Role in Protecting Chinese Investors

What is investment treaty protection?

Modern investment treaties as we know them have been around for approximately 60 years. In addition to providing qualifying international investors with substantive protections against unfair treatment, discrimination and asset expropriation by the host State into which they have invested, one of the key benefits of investment treaties is that they allow investors – companies and even natural persons – to bring arbitration claims directly against States for wrongful treatment of their investments.

This innovation in the world of international dispute resolution originated in the early 1960s and significantly improved the position of foreign investors vis-à-vis host States because a foreign investor would not have to rely on the domestic courts of the host State in seeking redress; an option which may not be attractive concerning the actions of the State itself.

The right to bring arbitration claims against host States is becoming increasingly important to Chinese investors in circumstances where the volume and financial value of outbound investment by Chinese investors has been increasing substantially over the past two decades – a trend that is highly likely to continue. It is an important means of protecting Chinese investment abroad.

A Chinese investor may not have to exercise such right by way of actually filing the arbitration claim to protect its investment from the host State’s wrongful treatment. The host State will likely be more hesitant to conduct wrongful acts knowing the existence of such right from the investor, and when wrongful treatment does happen, threatening to exercise such right itself puts the investor in a better position for negotiating a settlement with the host State.

Additionally, with the enabling framework of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention“) and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention“), foreign investors are able directly to enforce arbitral awards in their favour against host States.

Under the New York Convention, States parties are obliged to recognise arbitral awards as binding and enforce them,[1] with limited exceptions, and under the ICSID Convention, States parties are obliged to recognise an ICSID award as binding and enforce it as if it were a final judgment of a court in that State.[2] The coverage of both these conventions is extensive with the New York Convention having 166 States as parties and the ICSID Convention having 155 Contracting States.

This means that investors are able to bring enforcement claims against host States in various countries in order to obtain payment of compensation due under arbitral awards, ensuring the efficacy of the dispute resolution system. For example, in May last year, a US appeals court upheld a decision for Swedish investors to enforce a USD 356 million arbitral award against Romania.

Given the benefits of investment treaties and China’s large and growing investment treaty network, Chinese investors are well placed to protect their foreign investments when they are treated in a manner that contravenes international investment treaty protections.

China’s investment treaties

China’s economy has experienced extraordinary changes over the last few decades. One remarkable aspect of these changes is the growth in China’s capital exports which are mainly in the form of foreign direct investment (“FDI“). It has been reported that as of the end of 2019, China’s FDI covered more than 190 countries and regions around the world and totalled USD 120 billion, an amount significantly larger than many countries’ entire economies.[3]

China’s investment treaty network reflects this large number of outbound investments. Today, China has the second largest number of investment treaties in place, with over 120 in force.[4] Yet, for a long time, relatively few Chinese investors took advantage of the protections provided by these investment treaties. Indeed, prior to 2010, there was only one known investment treaty case filed by a Chinese investor against Peru concerning an investment in a fish-based food business.[5] Nevertheless, it should be noted that the tribunal found for the Chinese investor and awarded it compensation of almost USD 800,000 plus interest.[6]

One of the reasons for this paucity of claims filed by Chinese investors may be that China’s earlier investment treaties in the 1980s and 1990s contained more restrictive investor-State dispute settlement (“ISDS“) clauses. A typical clause in these investment treaties would provide for arbitration regarding disputes as to the “amount of compensation for expropriation“.[7] While such provisions can potentially narrow arbitration claims by foreign investors against China, they may have correspondingly reduced the possibility of Chinese investors bringing such claims against other countries for breaches of their rights under the treaties.

Perhaps recognising this, the Chinese Government, since the turn of the new millennium, has entered into investment treaties with notably broader ISDS clauses which allow investors to submit all disputes concerning the investment to arbitration.[8] Since 2010, Chinese investors have filed a further six publicly-listed treaty cases, the most recent of which was filed against South Korea and registered with the International Centre for Settlement of Investment Disputes (“ICSID“) on 3 August 2020.

Investment treaty protection for Chinese investors

China’s investment treaty network provides Chinese investors and investments with significant protections against political and regulatory risk in other countries. Knowledge of these protections will put investors in a stronger position should such political and regulatory risks occur and help guide their effective resolution.

Does the investor qualify for protection: Jurisdictional considerations

The first question that faces any investor seeking treaty protection is whether it qualifies for protection under an investment treaty. The relevant considerations are whether (i) there is an investment treaty between China and the country in which the investment is to be made and if so, (ii) whether the Chinese investor qualifies for protection for its investment under that treaty.

In order to qualify for investment protection under any treaty, the investor must meet certain jurisdictional requirements specified under the treaty, in particular, the requirements of:

  • being a qualifying “investor”; and
  • having a qualifying “investment”.

These are two important requirements because if these requirements are not met, an arbitral tribunal will not have jurisdiction to determine the merits of the dispute.

To determine whether the requirements of qualifying “investor” and “investment” are met, it is crucial to be mindful of the specific language of the applicable Bilateral Investment Treaty (“BIT”) and analyse it carefully in the context of the investment treaty jurisprudence. BITs typically include a definition of “investor” and “investment” with requirements that will have to be met.

For example, in the China-Uzbekistan BIT (2011), investors are defined as “natural persons who have nationality of either Contracting Party in accordance with the applicable laws of that Contracting Party” or “any entities, including companies, firms, associations, partnerships and other organizations incorporated or constituted under the applicable laws and regulations of either Contracting Party and have their seats and substantial business activities in that Contracting Party“.[9] Given the definition of “investor” under this BIT, mere special purpose vehicles set up in China will likely be excluded from protection for their investments in Uzbekistan.

It should further be noted that the issue has arisen as to whether a wholly state-owned Chinese company can qualify as an “investor” for the purposes of bringing a claim against another State. On this, the argument has been made by respondent States that state-owned companies are not commercial entities but rather “quasi-instrumentalities of the Chinese government“, and hence cannot be considered “investors” within the protection of the treaty.[10] However, in Beijing Shougang v Mongolia, the arbitral tribunal roundly rejected such an argument, considering that the state-owned companies had engaged in economic activities and it was irrelevant whether China directly or indirectly owned the companies.[11]

Notably, this decision was based on the specific text of the China-Mongolia BIT (1991) which defined investors as including “economic entities” and also on the tribunal’s finding that there was no evidence to show that the companies acted under the Chinese Government’s express instruction to invest abroad in order to serve China’s foreign policy goals.[12] As such, each case must be examined on its specific facts.

Investment treaties also generally set out a list of assets and properties that are considered as qualifying “investments” and may also stipulate the assets and properties that are excluded from the scope of treaty protection. For example, the China-Uzbekistan BIT (2011) excludes “claims to money that arise solely from commercial contracts for the sale of goods or services by a national or enterprise in the territory of the State of the other Contracting Party” and “claims to money that arise from marriage or inheritance and have no characteristics of investment” from its definition of a qualifying “investment”.[13] Therefore, it is important to examine the particular wording of each investment treaty in order to determine whether an investor or investment falls within or outside the treaty’s scope of protection.

It should also be noted that depending on applicable arbitration rules, these rules may impose additional jurisdictional requirements which have to be met in order for a tribunal to be able to decide the substance of the dispute. For example, for arbitrations commenced under the ICSID Convention – which is an option under certain Chinese investment treaties – investors have to ensure that they additionally meet the requirements of being a qualifying “investor” with a qualifying “investment” under Article 25 of the ICSID Convention.[14]

Finally, before leaving the topic of jurisdiction, it would be remiss not to also briefly mention the issue of timing. Treaties may limit the temporal scope of protection. For example, in a case brought by a Chinese investor, Ping An, against Belgium regarding Belgium’s nationalisation of Fortis Bank, in which Ping An was a significant shareholder, the tribunal determined that the China-Belgium BIT (2009) did not cover disputes which arose before the treaty came into force and therefore declined jurisdiction.[15]

These jurisdictional questions – on qualifying “investor”, “investment” and timing – are key issues which should be carefully analysed, not just when a dispute arises, but also importantly, before the decision to invest is made. Consideration of these questions will allow investors to be apprised of the treaty protections they may (or may not) receive in the event of political or regulatory interference in the host country.

Substantive standards of protection under investment treaties

Some of the investment protections typically included in investment treaties are as follows:

  • Fair and equitable treatment (“FET“): FET requires that the host State act in a transparent manner and in good faith, respect procedural propriety and due process as well as the investor’s reasonable and legitimate expectations. Further, it requires that the host State does not behave in an arbitrary, grossly unfair, unjust, idiosyncratic, or discriminatory manner vis-à-vis the investments of foreign investors;
  • Protection from expropriation without adequate compensation: Most treaties protect against unlawful expropriations. This means that (a) an expropriatory measure must serve a public purpose; (b) the measure must not be arbitrary or discriminatory; (c) the expropriation must follow principles of due process; and (d) the expropriation must be accompanied by compensation, usually equivalent to the market value of the expropriated investment;
  • National treatment and most-favoured-nation (“MFN“) treatment: The national treatment obligation is an obligation on the host State to treat qualifying foreign investors at least as well as they treat local investors and the MFN treatment standard requires that the host State treat qualifying foreign investors no less favourably than those of any third State;
  • Freedom to transfer profits and capital out of the country: Many investment treaties allow qualifying foreign investors to seek compensation if the host State implements measures that have the effect of freezing the investor’s capital in the host State or obstructing transfers of funds out of the host State;
  • Full protection and security (“FPS“): The FPS standard relates to the host State’s obligation to take diligence measures regarding the security of persons and properties; and
  • Umbrella clause: An umbrella clause guarantees the observance of obligations assumed by the host State to the investor, separate to those already included in the treaty.

Notably, the nature and scope of protection standards depend on the specific text of the treaty.


China’s outbound investments have grown significantly in the past decades and this is reflected in its wide-ranging network of investment treaties signed with other countries. These investment treaties provide an important means for Chinese investors to strengthen the protection of their international investments against political and regulatory risk and uncertainty. By utilising China’s investment treaty network, Chinese investors will have an additional safeguard against significant adverse political and regulatory interferences with their foreign investments.

This article was co-authored by Jern-Fei NG QC, Queen’s Counsel at 7 Bedford Row; Stephen Peng, Partner at Jincheng Tongda & Neal; Lan Li, Partner at Jincheng Tongda & Neal; Hussein Haeri, Partner at Withers; and Christina Liew, Associate at Withers.

[1] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) 330 UNTS 3, Art. III.
[2] Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (1965) 575 UNTS 159, Art. 54.
[3] Ping Han, “Capital Export and Economic Growth – The Case of China” 8 IJMSR 55, June 2020 at pp. 58-59.
[4] UNCTAD Investment Policy Hub, “IIAs by Economy: China“, last accessed 16 December 2020. China is second only to Germany in terms of its number of investment treaties.
[5] Tza Yap Shum v Republic of Peru, ICSID Case No. ARB/07/6, Award, 7 July 2011.
[6] Tza Yap Shum v Republic of Peru, ICSID Case No. ARB/07/6, Award, 7 July 2011, section VIII.
[7] For example, the China-Greece BIT (1992), Art. 10(2) provides that “the investor concerned may submit the dispute either to the competent court of the Contracting Party, or to an international arbitration tribunal if the dispute concerns the amount of compensation referred to in Art. 4.”
[8] For example, the China-Iran BIT (2000), Art. 12(1) and (2) provide that “any dispute […] between the host Contracting Party and investor(s) of the other Contracting Party with respect to an investment” may be referred to an arbitral tribunal of three members.
[9] China-Uzbekistan BIT (2011), Art. 1(2) (emphasis added).
[10] Beijing Shougang and others v Mongolia, PCA Case No. 2010-20, Award, 30 June 2017, ¶ 408.
[11] Beijing Shougang and others v Mongolia, PCA Case No. 2010-20, Award, 30 June 2017, ¶¶ 416-417.
[12] Beijing Shougang and others v Mongolia, PCA Case No. 2010-20, Award, 30 June 2017, ¶ 418.
[13] China-Uzbekistan BIT (2011), Art. 1(1).
[14] ICSID Convention, Art. 25.
[15] Ping An Life Insurance Company, Limited and Ping An Insurance (Group) Company, Limited v The Government of Belgium, ICSID Case No. ARB/12/29, Award, 30 April 2015, ¶ 223.

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