China’s investment treaty programme: Past, present and future


Over the past decade, China has evolved from a marginal to a dominant player in international development finance. A recent study showed that outstanding loans from the two major Chinese development banks and 13 regional funds were well in excess of the US$700 billion owed to the six western backed multilateral development institutions. That process, however, has brought about increased financial, legal and political risks for China’s development funds, banks and investors. In recent years the press has reported an increasing number of major infrastructure projects turned sour in Latin American, Africa and Asia, while investment policies and lending protocols of major Chinese investors are undergoing a thorough re-evaluation. This raises the question of the protection of Chinese investments abroad.


Foreign investments in China and Chinese investments abroad are protected by a network of bilateral investment treaties (BITs) concluded between China and its main commercial partners. By July 2015, China had concluded 129 of such BITs. These treaties traditionally provide investors with two main benefits: substantive standards for the protection of their investments (for example, protection against expropriation, national treatment and fair and equitable treatment), and a direct access to international arbitration for the resolution of disputes between the investor and the host state.

China’s investment treaty programme: Past, present and futureThe protection offered by Chinese BITs has significantly evolved since China concluded its first BIT with Sweden in 1982. First generation BITs were concluded in the 1980s and generally afforded a low level of protection to investors. They either did not include any investor-state arbitration clause at all, or contained a clause that only covered disputes relating to the amount of compensation payable following an expropriation. The second generation of BITs emerged at the end of the 1990s and remedied most deficiencies of the first generation. These BITs provided for arbitration of all investor-state disputes and also gradually included substantive provisions in line with international standards. The third generation of BITs emerged more recently and finds a good illustration in the China-Canada BIT concluded in 2012, which attempts to strike a better balance between the protection of investors and that of the host state’s interests. In some respects, third generation BITs offer a lower level of protection to foreign investors but still provide for arbitration of all investor-state disputes.


The evolution of Chinese BITs does not necessarily mean that newer BITs have replaced BITs of the first generation. While China has renegotiated several of its first and second generation BITs, many investments in China and Chinese overseas investments still remain covered by first generation BITs, and a number of important, high risk destination countries for Chinese outbound investments have either no BITs with China or are still covered by first generation BITs. Thus, out of the 16 countries that account for the highest level of Chinese outbound investments in natural resources, 11 have no BIT with China at all or are only covered by a first generation treaty. Likewise, out of the 64 countries listed under the Belt and Road initiative, 43 countries have no BIT with China or are still covered by a first generation treaty.

Thus, rather than a consistent network affording a similar level of protection to Chinese investors abroad wherever they invest, the Chinese BIT network is more akin to a patchwork, with little or no relation between the level of protection afforded to Chinese investors in each destination and the level of risk or importance of these destinations in terms of outbound investments. In light of China’s Action Plan on the Belt and Road Initiative released by MOFCOM and the MOFA on 26 March 2015, however, which contemplates a push towards “negotiations on bilateral investment protection agreements … to protect the lawful rights and interests of investors”, one can expect that BITs with these countries will be negotiated or renegotiated in the years to come.


In the meantime, Chinese investors willing to invest in these countries might contemplate adopting legitimate methods of “investment planning” by channelling their investment through holding companies incorporated in countries that have concluded BITs offering a high level of substantive protection and effective resolution of disputes through international arbitration with the countries of destination of their investments. Such arrangements have been accepted by arbitral tribunals in a number of cases but rejected in others, depending on the wording of the treaties, substance of the holding company and timing of the arrangement. Some BITs expressly deny protection to investors having no substantial activity in, or other connection to, the country through which the investment is channelled.

Arbitral tribunals have also rejected similar arrangements when they were made after the dispute between the investor and the state arose. Thus, investors who consider channelling their investments through a holding structure are well advised to do it at the outset of the investment process and to make sure that the holding company has sufficient substance or operations in the country through which the investment is channelled, where this is required under the relevant treaty. More generally, given the variety in the level of protection offered by different BITs and the complexities of the case law on investment planning, seeking specialist advice at the outset of the investment process is strongly recommended.

Emmanuel Jacomy and Nils Eliasson are international arbitration partners at Shearman & Sterling.