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

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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.

THREE GENERATIONS OF BITS

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.

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