10 June 2013

上课: FDI and BITS – Enter Stage 3, Thank You Barbados

China is a land of contradictions. While one NPC (National People’s Congress) member refers to China as a developing country, a standing judge of the Supreme Court staunchly defines China as a developed nation. The Middle Kingdom flaunts a free market alongside a planned economy. It is both an investor (especially in Africa) and the largest recipient of foreign direct investment in the world after surpassing the USA in 2012.

The first law relating to Foreign Direct Investment (FDI) was the Sino-Foreign Equity Joint Venture (EJV) Law promulgated in 1979, when China officially opened its doors to the world. Other traditional forms of FDI followed: Wholly-Foreign-Owned Enterprises (WFOE) in 1986, Sino-foreign Co-operative Joint Ventures in 1988. A few years later, new patterns joined the game: Foreign Investment Companies Limited by Shares (FICLS), Holding Investment Companies (HIC), and Build Operation Transfer (BOT)s. 

FDI and Joint Venture Law is a clear demonstration of one of the major themes in Chinese Law: incremental transition. Not only does this area of law speak of the co-existence of prima facie mutually exclusive dichotomies (China standing with one leg in the developed and the other in the developing world), but it also highlights China’s priorities as it slowly opens up. China has gone through three distinct stages of development, most clearly visible in Bilateral Investment Treaties (BIT) she has signed. 

Stage One kicks off in 1982: China signs her first BIT with Sweden (yes, the Swedes – but fear not, lest all my ramblings about the Deutsch be naught, Germany was close behind). This was the era of the traditional patterns for FDI, where the norm was limited liability companies where the Chinese would be able to have a say (for this was the time when the legal climate lacked a Corporate Law and all corporations belonged to the government). China wanted investors really invest in China: no half-built house of cards subject to the whims of the foreign market and no exploitation of China’s labour and natural resources. EJVs required foreign investors to invest a minimum of 25% of the capital (as opposed to most other contemporary systems in developing countries, which set a maximum in order to prevent foreign control). China wanted foreign investors to make efforts in the management of their joint ventures; to be invested in their enterprises. Registered capital, profits and risks were to be divided by equity and no matter what the percentage of investment was covered by the foreign investor, the Chairman of the Board of Directors (the big boss of the EJV), had to be Chinese. All production and operation plans had to be submitted in their intimate entirety to the corresponding administrative authority (a planned economy check by the government). WFOEs – since no Chinese party can participate in the enterprise – were governed by two strict requirements: (1) advanced technology and equipment should be used; and (2) products produced should be marketed outside China. China would benefit through the in-state building and operation of advanced technology. Activate educational thirst for a self-sustainable industrial revolution. 

In Stage One, most BITs advocated negotiation and consultation first and only allowed international ad hoc arbitration if the local court confirmed nationalization or expropriation (read: at the discretion of the Chinese government). 

Stage Two spans 1993-1998, defined by China joining ICSID (International Center for Settlement of Investment Disputes). The laws themselves were changing: no longer was the Chairman of the Board of Directors required to be Chinese – this was to be decided privately by the parties with the only stipulation that if the Chairman was foreign, the Vice-Chairman be Chinese and vice versa. And the big drop: no arbitrary nationalization or expropriation of the joint venture was permitted to the government. Except for “the social public interest”, joint ventures could breathe easy. BITs added provisions: competent courts of the contracting party accepting the investment can settle disputes (before, this was limited to Chinese domestic courts); disputes involving the amount of compensation for expropriation that cannot be settled within six months could now be submitted to ICSID or ad hoc arbitration if the state is not party to ICSID (with the caveat that only disputes involving the amount of compensation for expropriation could be submitted to the ICSID or ad hoc arbitration).

Stage Three is largely marked by reforms to many of the FDI and Joint Venture laws enumerated at the beginning of this essay – all circa 2000 (China having ascended to the WTO effective in 2001). The ascension of China to the WTO is a reoccurring factor in much of the legal reform present in the Chinese system. Trade unions were granted a voice. Raw materials for the joint venture could be purchased both inside and outside of China, according to the principle of fairness and reasonableness. Furthermore, there was no longer a need to file production and operation plans to the Chinese government. The independence of the joint ventures became a factor in law-making.

But Stage Three really begins in 1998 with the signing of the BIT between China and Barbados. This BIT lifted all limitations: all disputes, not just those involving expropriation or nationalization compensation, could be submitted to ICSID and ad hoc tribunals. And while ad hoc tribunal awards are only final and binding as reviewed by domestic Chinese courts, ICSID awards are final and binding with only ICSID itself having the authority to declare the awards non-enforceable. The unspoken shift: Chinese courts delegating some of their power. 

Three stages, a neat depiction of changing Chinese priorities: incremental opening up of the Chinese economy and the acquiescence of the legal system to playing the international legal game (at least as far as disputes go). The BIT with Barbados marked the start of a stage that is still incrementally working towards greater independence for joint ventures and greater protection of foreign enterprises today.

Thank you, Barbados. 

KEYWORDS: FDI, Joint Venture Law, EJV, WFOE, BIT, Incremental Transition, Opening Up, Developed & Developing, WTO, ICSID, ad hoc international tribunals, expropriation, tribunal awards

No comments:

Post a Comment