Towards China's development goals: an evaluation of the role played by China's foreign investment legal regime

Abstract

This thesis evaluates the role played by China’s foreign investment legal regime in leading its inward and outward investments towards the country’s development goals. China has set five development goals that are particularly related to its two-way investments: A) building technological capacity, B) deepening integration into the global economy, C) promotion of green development, D) protection of security, and E) participation in global economic governance and rule-making. The fulfilment of these development goals requires both the promotion and protection of desired foreign investment flows, and effective supervision and management thereof. These requirements can be achieved through proper design of the foreign investment legal regime, which comprises China’s domestic laws governing inward and outward foreign investments, and China’s international investment treaties. Moreover, the “Belt and Road” initiative proposed by China in 2013 also has significant influence on the foreign investments and their contribution to the development goals, hence is also covered in the research. China used to employ a dual-track system to govern its inward foreign investments separately from their domestic counterparts. Accordingly, foreign investments were subject to both strict control (inferior national treatment) and granted preferential treatments (superior national treatment). Although the approach has to some extent ensured their contribution to China’s development, the restriction of enterprise autonomy and the wide discretion of the authorities also discouraged investors from entering the market, while the deficiencies in the rules have impeded the effectiveness of investment supervision and management. To address the problems, an essential legal reform was launched in 2020, which eases administrative control over inward foreign investments, enhances investment promotion and protection, and improves the investment management through more comprehensive and clear rules. However, regulatory flaws, problematic implementation and a lack of ambition can be identified, which can dilute the improvements made by the reform. China’s domestic laws governing its outward foreign investments have suffered from similar problems regarding undue restriction of enterprise autonomy and ineffective supervision of investments. Changes have been made constantly to address the problems and enhance the coordination of the laws with the requirements of the development goals, especially in the aspects of investment supervision, promotion and protection. However, deficiencies can still be found, like the still burdensome administrative procedures and improper implementation of the rules. Moreover, the sophisticated array of legal documents, especially with the lack of the status of “law”, contain various conflicts and overlaps, which can trigger confusion to both investors and the authorities, and thus impede the functioning of the legal regime. To further support the expansion of China’s outward investments, the feasibility of establishing an investment court in China’s domestic legal system is explored. Although the possibility exists theoretically, the proposed court can face various challenges, and thus it can be difficult to realize the plan. As one important component of China’s foreign investment legal regime, China’s international investment treaties have also played an essential role in the governance of China’s two-way investments. However, the majority of these treaties are outdated, which neither grant sufficient protection to foreign investments due to the lack of important investment treatment clauses and limited access to investor-State arbitration, nor leave enough regulatory space for host States to adopt measures for policy objectives. Moreover, specific rules that can incorporate the consideration of development goals in investment arbitration and guarantee proper functioning of institutional management of the treaty are also missing. Although these problems are addressed to some extent in treaties that are recently signed, the failure to distinguish between those with major recipients and sources of China’s foreign investments make it difficult to serve different requirements of the development goals for China’s inward and outward investments. The problems can be addressed through updating the treaties by amendments or replacements. However, the broad most favoured nation treatment clause included in many China’s IIAs may impede the effort. The “Belt and Road” initiative has successfully encouraged a significant amount of China’s desired foreign investment flows, while other plans under the initiative can also support their growth and contribute to the development goals. However, the development of the initiative can encounter various challenges exist both internationally and domestically. One approach to mitigate the challenges can be the establishment of a multilateral investment treaty covering the participating States. However, this proposal is ambitious, and thus flexible arrangement is needed to enhance its feasibility. The research finds that China’s foreign investment legal regime has gradually changed towards the development goals, through enhancing investment promotion and protection, as well as strengthening supervision and management of China’s two-way investment flows. This trend can be expected to continue in the future. However, various obstacles can slow the process or even dilute the effort exerted by the changes, like problematic implementation of domestic laws and outdated investment treaties that remain in force. Accordingly, more systematic adjustments of both the legal regime and the broader legal system is necessary to bring ongoing and future changes into full fruition, and thus ensure their contribution to the development goals.