Notwithstanding China’s endorsement of investor-state arbitration more than a decade ago, only one investor claim has been initiated against it and it was withdrawn.  This does not necessarily mean that foreign investors will not make such claims in the future, but rather that proceeding against China, from an economic rationalist perspective, is likely to be contentious, costly and dilatory.  However, these concerns are not peculiar to China. Economically and politically powerful states, not least of all the United States, are less frequently subject to investor-state arbitration than poorer states for much the same reason. 

What is increasingly apparent, however, is that China is preparing itself for investor-state proceedings against it in the future. This is evident, for example, in China’s growing interest in the functioning of the International Center for the Settlement of Investment Disputes [ICSID], among other institutions, in its inclusion of investor-state arbitration in its Model Bilateral Investment Agreement and in the various regional and bilateral agreements it has concluded. 

What is also apparent is that China is well aware that the price of negotiating treaties to promote both inbound and outbound investment is the prospect that foreign investor claims will inevitably be lodged against it.  However, China is also aware that the investment benefits may well outweigh these costs.  After all, China has grown into the second largest economy in the world.  It is the second largest recipient of foreign direct investment [FDI].  It is sixth in outward FDI.  It well appreciates the economic rationalist reasons for promoting such investment, along with the risks.

China’s economic rationalization of FDI is borne out by its treaty practice. China now has 139 bilateral investment treaties [BITS], second only to Germany.  China has 26 BITS with African countries including among others, Ghana, Tunisia, Egypt, Kenya, South Africa, Mozambique and Mali.  It has BITS along with Free Trade Agreements [FTAs] with various Western countries, notable a BIT with Germany in 2004.  It has negotiated 9 new free trade agreements in the last decade, with others under negotiation, including the Gulf Cooperative Council, Australia, Iceland, Norway, and the South African Customs Union. It has most recently concluded an investment agreement with Korea and Japan which is awaiting ratification. It has also negotiated investment agreements, with Canada, Turkey and Chile, but which are not yet signed. A further agreement with India is under consideration. 

These developments have led some to expect that China ought to replicate the investment treaties that are devised by developed Western states and that it ought to do more to liberalize FDI.  What is important to appreciate is that China does not have lengthy experience with treaties of Friendship, Commerce and Navigation [FCN] treaties compared to the West and the US in particular. In addition, China as a developing country was historically subject to various treaties in which investment practice was dictated to it by dominant treaty parties, notably following the first Opium War between Great Britain and China: the Treaty of Nanking of 1842; the Treaty of Wanghia of 1844 with the United States; and the Treaty of Huangpu of 1844 with France. Of note and a point of resentment in China, the Treaty of Wanghia and the Treaty of Huangpu granted most favored nation treatment to US and French nationals. 

China therefore has understandable reasons to view trade and investment treaties with the West as imperialist impositions. This view is also not unlike the recent criticisms of Latin American and African countries about treaties being imposed on them by developed and colonizing states.   It was also a reason why China began developing treaties with its then ally, the Soviet Union, in signing a Treaty of Friendship, Alliance and Mutual Assistance on 1950 and again, in 1958 seeking to develop and strengthen economic and cultural ties. 

Much has changed since then; and so has China.  In 1998 China adopted its ‘Going Abroad’ strategy which was included in its 2001 Outline of the Tenth Five-Year Plan for National Economy and Social Development.  China’s BITS program also began focused more on outbound investment. China signed onto the ICSID in 1993.  It provided for investor-state [ISA] in its BITs.  It granted many protections to foreign investors, not least of all to bolster its outbound investments in partner states.

Certainly, China could grant more protections to foreign investors.  The vast majority of the BITs it negotiates do not grant foreign investors ‘national treatment’ even though China’s Model BIT includes such a protection.  China is also criticized for preserving the confidentiality of ISA proceedings and not permitting third party interventions in proceedings.  It is challenged, too, for its ‘one-by-one’ method of approving applications for FDI in which each application must be formally approved by the appropriate Chinese regulatory authority before it can proceed.

However, the perfect liberalization of FDI is not a panacea.  Most countries, not limited to China, limit their liberalization of investments.  They define ‘investment’ restrictively and governmental regulation expansively.  They insist on confidential ISA proceedings and exclude amicus curiae briefs.    

Nor is it realistic to expect China to embrace the liberalization of investment in an identical manner to developed Western liberal states, given its ideological differences and developing economy. Nor, too, should China be accused of self-interest in seeking to liberalize FDI specifically to promote outbound investments.  Other capital exporters adopt comparable practices.  Even China’s one-by-one authorization of inbound investments is comprehensible given its planned and regulated economic and the size and diversity of its population.

Finally, the accusation that few foreign investors are likely to bring ISA claim against China is comparable to their reluctance to bring claims against other powerful countries.  Germany, with the largest number of BITs, has been subject to only one such claim.  This is not to deny that foreign investors that lodge ISA claims against China will face formidable resistance from a centrally directed economy with the financial muscle and capacity to mount a consolidated defense in the national interest. What is contended is that it is too early in China’s participation in the BITS revolution to conclude that China will be impervious to foreign investor claims, or will necessarily deter, or readily win claims brought against it.  It is simply too early to make such a prediction. What is also contended is that investment protectionism and secrecy is the other side of the investment liberalization coin.  Liberal states repeatedly circumscribe the rights of foreign investors, inter alia, on public interest grounds. Given their practices, it is hardly reasonable to expect China to forego them.