Chinese state-owned enterprises and international investment law

• Author: Ming Du
• Position: Professor and Director of Durham Centre for Chinese Law and Policy, Durham University, UK
• Pages: 627-734

CHINESE STATE-OWNED ENTERPRISES AND

INTERNATIONAL INVESTMENT LAW

MING DU*

ABSTRACT

Not only do Chinese SOEs play a key role in China’s domestic economy, but

they are also a major force in implementing the Government of China’s ambi-

tious Belt and Road Initiative, a global infrastructure development strategy

adopted by the Chinese government to invest in nearly 150 countries and inter-

national organizations. The expansion of Chinese SOEs’ global footprint has

caused widespread concerns in host countries about their implications for

national security, fair competition, transparency, and even the function of the

free market at home. Since the multilateral trade and investment regimes that

took shape in the post-war period did not anticipate many of the special features

of Chinese SOEs, states have resorted to unilateral or bilateral measures to

counteract Chinese SOEs’ competitive advantages in international investment

and subject them to heightened national security scrutiny.

The objective of this Article is to critically examine the alleged challenges that

the expansion of Chinese SOEs’ outbound foreign investment has posed to the

liberal international investment order and to analyze whether the current inter-

national investment regime is resilient enough to accommodate the systemic fric-

tion between heterogeneous economic systems. It argues that international

investment law is poorly designed to deal with Chinese SOEs because it is prem-

ised on some untenable assumptions, and these assumptions are not applicable

to Chinese SOEs. The lack of effective international rules pushes nation states

to become norm entrepreneurs in international investment law. However, the

new SOE norms not only risk either overshooting or undershooting the Chinese

SOE problem but also result in greater fragmentation of the international

investment regime.

I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 629

II. UNPACKING CHINESE STATE-OWNED ENTERPRISES . . . . . . . . . . . . 635

A. The Political Economy of SOEs in China. . . . . . . . . . . . . . 635

B. An Overview of China’s SOE Reforms. . . . . . . . . . . . . . . . 639

1. China’s SOE Reforms Before 2012 . . . . . . . . . . . 639

2. SOE Reforms in the Xi Jinping Era (2013-Present). . 647

* Professor and Director of Durham Centre for Chinese Law and Policy, Durham University,

UK. I wish to thank all Georgetown JIL editors, in particular Yoosong Lee and Xuetao Wang, for

their meticulous editing work. V

C 2023, Ming Du.

627

C. Chinese SOEs and the Chinese Party-State. . . . . . . . . . . . . 654

D. The Porous Boundary of SOEs and Privately-Owned

Enterprises in China. . . . . . . . . . . . . . . . . . . . . . . . . . . . 658

III. THE CHALLENGES OF CHINESE SOES TO INTERNATIONAL

INVESTMENT LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660

A. Unfair Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660

B. Reciprocity in Market Access . . . . . . . . . . . . . . . . . . . . . . 663

C. Non-Commercial Objectives . . . . . . . . . . . . . . . . . . . . . . . 665

D. Human Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 668

E. Ideological Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671

IV. THE STANDING OF CHINESE SOES IN INTERNATIONAL INVESTMENT

ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672

A. Taking Stock: SOEs in ISDS . . . . . . . . . . . . . . . . . . . . . . 674

B. The ILC Articles and Chinese SOEs . . . . . . . . . . . . . . . . . 682

1. Do Chinese SOEs Exercise Elements of

Governmental Authority?. . . . . . . . . . . . . . . . . . . 682

2. Are Chinese SOEs Agents of the Government of

China? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686

C. A Policy Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687

V. WEAPONING NATIONAL SECURITY REVIEW AGAINST CHINESE

SOES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 691

A. Explaining the Proliferation of National Security Review. . . 692

B. Heightened Scrutiny of Chinese SOEs’ Investment . . . . . . . 695

C. A Critique of Weaponized National Security Review: The

United States as an Example . . . . . . . . . . . . . . . . . . . . . . 697

1. The Expansive Concept of National Security. . . . 697

2. Unpredictable, Discriminatory, and Politicized

National Security Review . . . . . . . . . . . . . . . . . . . 698

D. Challenging National Security Decisions Before

International Investment Tribunals . . . . . . . . . . . . . . . . . 702

1. The National Security Exception before

Investment Tribunals . . . . . . . . . . . . . . . . . . . . . . 705

2. Why Have Not Chinese Investors Challenged

Arbitrary National Security Reviews? . . . . . . . . . . 712

VI. LOOKING TO THE FUTURE: NEW SOE RULES IN MEGA-REGIONAL

FTAS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717

A. Is the Definition of SOE too Narrow?. . . . . . . . . . . . . . . . . 719

B. Non-Discriminatory Treatment and Commercial

Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723

C. Non-Commercial Assistance. . . . . . . . . . . . . . . . . . . . . . . 725

D. Will Extensive Carve-outs Hollow Out the SOE Rules? . . . . 727

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E. The Investment Law Implications of the New Rules for

Chinese SOEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 729

F. Will China Be Able to Implement SOE Obligations? . . . . . . 730

VII. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 733

I. INTRODUCTION

Despite three decades of extensive reform and privatization, state-

owned, state-controlled, or otherwise state-influenced enterprises and

sovereign wealth funds remain an important economic force in the

global economy. They are serious competitors to private firms in global

markets for market shares, resources, and ideas.

1

Przemyslaw Kowalski & Kateryna Perepechay, International Trade and Investment by State

Enterprises 7 (OECD Trade Policy Papers No. 184, 2015), https://www.oecd-ilibrary.org/

docserver/5jrtcr9x6c48-en.pdf?expires=1680206750&id=id&accname=guest&checksum=8D8EE7

B80DCE0C5B433C049064C39D85.

According to the

Organization for Economic Cooperation and Development (OECD),

132 of the world’s largest 500 enterprises measured by annual revenues

were wholly or majority owned by sovereign governments in 2020, com-

pared to 34 two decades ago.

2

Organization for Economic Co-Operation and Development [OECD], Transparency and

Disclosure Practices of State-owned Enterprises and Their Owners 8 (2020), https://www.oecd.org/

corporate/Transparency-Disclosure-Practices-SOEs.pdf.

In response to the COVID-19 crisis, gov-

ernments have undertaken a vast array of measures to support the

business sector. In some cases, rescue packages include the acquisition

of equity stakes in companies in financial distress, increasing the num-

ber and presence of state-owned multinational enterprises to about

1,600 in the global economy in 2020.

3

United Nations Conference on Trade and Development, World Investment Report 2021:

Investing in Sustainable Economy, U.N. Doc. A/Conf./21 https://unctad.org/system/files/official-

document/wir2021_en.pdf.

State-owned enterprises (SOEs) hold a prominent position in

China’s socialist market economy system.

4

There is no uniform definition of SOEs in part because of the ambiguity about the degree of

state ownership or control needed to be called an SOE. The OECD defines it as “any corporate

entity recogni[z]ed by national law as an enterprise, and in which the state exercises ownership[.]”

See Organization for Economic Co-Operation and Development [OECD], Guidelines on

Corporate Governance of State-Owned Enterprises 14 (2015), https://www.oecd-ilibrary.org/governance/

oecd-guidelines-on-corporate-governance-of-state-owned-enterprises-2015_9789264244160-en.

Ownership is understood to imply control, either by the state holding full or majority of voting

shares or otherwise exercising an equivalent degree of control. See id. “Examples of an equivalent

degree of control would include, for instance, cases where legal stipulations or corporate articles

of association ensure continued state control over an enterprise or its board of directors in which

Even as market-oriented

1.

2.

3.

4.

CHINESE STATE-OWNED ENTERPRISES

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