Expropriation and Compensation
Chinese law prohibits nationalization of foreign-invested enterprises except under "special" circumstances. Chinese officials have said these circumstances include national security and obstacles to large civil engineering projects, but the law does not define the term. Chinese law requires compensation of expropriated foreign investments but does not describe the formula to be used in calculating the amount. The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, though the Department has notified Congress of several cases of concern.
Chinese officials typically urge firms to resolve disputes through informal conciliation. If formal mediation is necessary, Chinese parties and the authorities typically promote arbitration over litigation. Many contracts prescribe arbitration by the China International
Economic and Trade Arbitration Commission (CIETAC). Some foreign parties have obtained favorable rulings from CIETAC, while others question CIETAC's procedures and effectiveness. Other arbitration commissions exist and are usually affiliated with the government at the provincial or municipal levels. For contracts involving at least one foreign party, offshore arbitration may be adopted.
Formal commercial disputes between investors are heard in economic courts. China's court system is not independent of the government, and the government often intervenes in disputes. Corruption may also influence local court decisions and local officials may disregard the judgments of domestic courts. China's legal system rarely enforces foreign court judgments.
Investor-state disputes leading to arbitration are rare in China. China has never lost an arbitration case resulting from an investment dispute. China is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).
Performance Requirements and Incentives
China has committed to eliminate export performance, trade and foreign exchange balancing, and local content requirements in most sectors. China has also committed to enforce only technology transfer rules that do not violate World Trade Organization (WTO) standards on intellectual property and trade-related investment measures. In practice, however, local officials and some regulators prefer investments that develop favored industries and support the local job market. In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose intellectual property content or license it to competitors, sometimes at below market rates. Many localities – including special economic zones, development zones and science parks – court foreign investors with packages of reduced income taxes, resource and land use fees, and import/export duties, as well as priority treatment in obtaining basic infrastructure services, streamlined government approvals, and funding support for startups. These packages may also stipulate export, local content, technology transfer, or other requirements.
Right to Private Ownership and Establishment
In China, all commercial enterprises require a license from the government. There is no broad right to establish a business. Disposition of an enterprise is also tightly regulated. The Administrative Permissions Law requires reviews of proposed investments for conformity with Chinese laws and regulations and is the legal basis for China's complex approval system for foreign investment.
Protection of Property Rights
The Chinese legal system mediates acquisition and disposition of property. Chinese courts have an inconsistent record in protecting the legal rights of foreigners.
Tangible Property Rights
All land in China is owned by the state. Individuals and firms, including foreigners, can own and transfer long-term leases for land, structures, and personal property, subject to many restrictions. China's Property Law stipulates that residential property rights will be automatically renewed while commercial and industrial grants shall be renewed absent a conflicting public interest. A number of foreign investors have seen their land-use rights revoked as neighborhoods are slated by the government for development. Investors report compensation in these cases has been nominal.
China's Securities Law defines debtor and guarantor rights and allows mortgages of certain types of property and other tangible assets, including long-term leases as described above. Foreigners can buy non-performing debt through state-owned asset management firms, but bureaucratic hurdles limit their ability to liquidate assets.