A Brief Analysis on the AI Safety Governance Framework

1. Background and Structure of AI Framework

    On September 9, 2024, the National Technical Committee 260 on Cybersecurity of Standardization Administration of China (“TC260”) has promulgated the AI[1] Safety Governance Framework (V1.0) (the “AI Framework), which aims to implement the Global AI Governance Initiative and promote consensus and coordinated efforts on AI security governance among governments, international organizations, companies, research institutes, civil organizations, and individuals, effectively preventing and mitigating AI security risks.[2]

    On October 18, 2023, the Cyberspace Administration of China has issued the Global AI Initiative (the “AI Initiative”), which puts forward to an open, fair and efficient approach to the development, security and governance of AI, intending to harness the transformative technologies for the benefit of humanity.[3]  According to the preface of the AI Framework, the AI Framework has been formulated to implement the AI Initiative, which highlights that the principles of development and security shall be equally guaranteed and facilitated, reflecting China’s commitment to addressing frontier AI safety issues and showcasing its proactive stance in shaping a secure AI landscape. 

    In general, the AI Framework, for one thing, identifies the AI-related security risks.  For another, it stipulates several measures that all stakeholders involved, like technology research institutions, product and service providers, users, governmental agencies, and social organizations should take to prevent and respond to those risks. 

    In order to thoroughly address the security concern in relation to AI, the structure of AI Framework encompasses the following aspects:

    • Safety/security risks;
    • Technical countermeasures;
    • Comprehensive governance measures; and
    • Safety guidelines for AI development and application.

    2. AI Security Risks and Proposed Measures

    In the main body of the AI Framework, it outlines AI-related risks and proposed solutions, which consists of technical measures, comprehensive governance measures as well as guidelines on guaranteeing the security regarding the development and application of AI. 

    To begin with, considering the risk sources of AI mainly come from two parts, the AI Framework presents AI-related security risks in dual aspects.  One part is the security issues originated from the AI technology itself, such as models and algorithms, training data and data output, as well as the AI system, which are categorized as the inherent safety risks in the AI Framework. 

    In addition to the inherent safety risks, during the AI application process, there are risks in respect of personal information leakage, misuse of AI technology, expanding effects of information cocoons, exacerbation of social bias and discrimination, and even the potential uncontrollability of AI, etc., which are classified as the safety risks in AI application. 

    Despite security risks and challenges brought by AI and posed in its application, there is no doubt that the coordination and unity of AI development is emphasized, and it has also reached the consensus that the stagnation of development is the biggest insecurity.[4]  Thus, the countermeasures at both technical levels and other aspects are stated in the AI Framework, aiming to build an agile and collaborative governance system, and ensuring that technology develops in an orderly manner under human control and serves the growing needs to the mankind.[5] 

    Below is a table attached to the last section of the AI Framework showing the AI-related security risks and the technical measures as well as comprehensive governance measures corresponding to each risk. 

    Safety risksTechnical countermeasuresComprehensive governance measures
    Inherent safety risksRisks from models and algorithmsRisks of explainability4.1.1(a)Advance research on AI explainability Create a responsible AI R&D and application system
    Risks of bias and discrimination4.1.1(b)
    Risks of robustness4.1.1(b)
    Risks of stealing and tampering4.1.1(b)
    Risks of unreliable output 4.1.1(a)(b)
    Risks of adversarial attack4.1.1(b)
    Risks from dataRisks of illegal collection and use of data4.1.2(a)Improve AI data security and personal information protection regulations
    Risks of improper content and poisoning in training data 4.1.2(b)(c)(d)(e)(f)
    Risks of unregulated training data annotation4.1.2(e)
    Risks of data leakage4.1.2(c)(d)
    Risks from AI systemsRisks of exploitation through defects and backdoors4.1.3(a)(b)Strengthen AI supply chain security Share information, and emergency response of AI safety risks and threats
    Risks of computing infrastructure security4.1.3(c)
    Risks of supply chain security4.1.3(d)
    Safety risks in AI applicationsCyberspace risksRisks of information and content safety4.2.1 (a)Implement a tiered and category-based management system for AI applicationEstablish a traceable management system for AI servicesIncrease efforts to train talent in AI safety and securityEstablish and improve mechanisms for AI safety and security education, industry self-regulation, and social supervisionPromote international exchange and cooperation on AI safety governance
    Risks of confusing facts, misleading users and bypassing authentication4.2.1 (a)
    Risks of information leakage due to improper usage4.2.1 (b)
    Risks of abuse for cyberattacks4.2.1 (a)
    Risks of security flaw transmission caused by model reuse4.2.1 (a) (b)
    Real-world risksInducing traditional economic and social security risks4.2.2 (b)
    Risks of using AI in illegal and criminal activities4.2.2 (a) (b)
    Risks of misuse of dual-use items and technologies4.2.2 (a) (b)
    Cognitive risksRisks of amplifying the effects of “information cocoons”4.2.3 (b)
    Risks of usage in launching cognitive warfare4.2.3 (a) (b) (c)
    Ethical risksRisks of exacerbating social discrimination and prejudice, and widening the intelligence divide4.2.4 (a)
    Risks of challenging traditional social order4.2.4 (a) (b)
    Risks of AI becoming uncontrollable in the future4.2.4 (b)

    With respect to the comprehensive governance measures, the AI Framework states a series of measures to tackle security risks posed in AI developing and application processes, offering chance for multi-stakeholders to participate and collaborate in the governance process.  For example, according to the AI Framework, the research on the transparency, trustworthiness, and error-correction mechanism in AI decision-making process shall be organized and conducted, based on the machine learning theory, training methods and human-computer interaction, thereby enhancing the explainability and predictability of AI systems while avoiding malicious consequences generated from unintended decisions made by AI.[6] 

    Furthermore, security risks in relation to the AI development and application is inevitably associated with data and network security, personal privacy, and intellectual property issues.  To coordinate with existing laws and regulations, the AI Framework follows the currently adopted practice in those areas.  For example, a tiered and category-based management mechanism should also be employed in AI application, which imposes requirements for specific users utilizing AI technologies in specific scenarios, as a way of effectively preventing the abuse of AI system.[7] 

    3. Guidelines and Practical Advice

    It is worth noting that, in the last part of the AI Framework, several guidelines are offered for various market players engaged in AI developing and application processes, including the model and algorithm developers, AI services providers, users in Key Areas,[8] and general users. 

    With respect to practitioners developing AI model and algorithm or providing AI-related services, the guidelines are directed to pertinent phases of each practicing process.  The AI model and algorithm developers, for instance, shall take the following measures: participating in internal discussions, organizing expert evaluations, conducting technological ethical reviews, listening to public opinions, communicating and exchanging ideals with potential target audiences, and strengthening employee safety education and training at key stages such as requirement analysis, project initiation, model design and development and training data selection and use.[9] 

    Regarding users either in the Key Areas or from a broad sense, safety guidelines are provided for raising the public awareness of AI-related security issues especially in terms of personal information and privacy protection, prevention of critical information leakage, and improving network security capabilities.[10] 

    As a practical matter, practitioners could adopt and further implement those guidelines during its daily practice and operation in developing and applying AI.  There are several pieces of practical advice merit attention:

    • Always keep in mind the redlines set by laws and regulations in terms of network safety, information security, personal information and privacy, and intellectual property protection during the AI developing and applying processes.
    • Establish and embrace mechanisms in respect of risk tracking, internal review, self-testing and evaluation as well as internal reporting mechanisms to prevent AI’s inherent security risks.
    • Ongoing trainings are required for both the AI developers and public users, for promoting awareness and engagement in ensuring secure AI development and application.     

    On a separate note, and particularly for purposes of eliminating AI-related security risks, not only the guidelines under the AI Framework should be borne in mind, but also the tiered and classification-based requirements for protecting data sources like the personal information under the current laws and regulations such as the Network Security Law, the Data Security Law and the Personal Information Protection Law, should also be complied with and implemented, so as to avoid any security risks (including but not limited to the data leakage and abuse), ensuring the safe and steady application and development of AI. 

    Additionally, as mentioned above, AI is closely intertwined with security and development policies.  As the core driver of the fourth industrial revolution, AI plays an irreplaceable role in both development and security.[11]  For AI to reach its full potential, it is widely recognized that governments should be thoughtful about protecting citizens, while also creating room for the positive innovation that AI can bring.[12]  The current PRC legal system addresses such inter-connected issue through a spectrum of laws, regulations, guidelines, opinions and so forth. 

    In order to fully take advantage of the cutting-edge technology, maximizing its benefits brought to key industrial sectors, the laws and regulations focus more on the application of AI technology in relevant industrial sectors to further promote the AI development, facilitating the actual application in particular scenarios.[13]  For instance, on June 18, 2024, the National Medical Products Administration of People’s Republic of China issued the List of Typical Application Scenarios of Artificial Intelligence for Drug Governance (the “AI Drug List”), presenting fifteen application scenarios that can play a leading demonstration role, possess characteristic of development potential, address pain points during the work, and tailor to more urgent needs.[14] 

    In conclusion, the AI Framework identifies risks at both AI developing and application levels which practitioners should pay attention to in their customary practice.  To deal with those risks and accompanying challenges, relevant practitioners could embrace and implement the measures and guidelines set forth in the AI Framework at certain stage throughout the AI development and application process.  What’s more, regarding a specific industrial sector, it is also worth noting and complying with the specialized sets of rules governing the security and development of AI technology in that field. 


    [1] AI stands for artificial intelligence. 

    [2] See the preface of the AI Framework. 

    [3] See the second paragraph of the AI Initiative.

    [4] See Alibaba Group, China Electronics Standardization Institute, Alibaba Cloud, and Alibaba Damo Academy, Generative Artificial Intelligence Governance & Practice White Paper (October 31, 2023).

    [5] See supra note 4.

    [6] See section 5.6 of the AI Framework. 

    [7] See section 5.1 of the AI Framework.

    [8] According to the AI Framework, the Key Areas refer to the governmental departments, critical information infrastructure, and areas directly affecting the public security and peoples’ health and safety.  

    [9] See section 6.1(a) of the AI Framework. 

    [10] See section 6.3 and 6.4 of the AI Framework.

    [11] See Han Na, China promotes coordination of AI governance, China Daily (July 2, 2024).

    [12] See Catherine Jewell, Artificial intelligence: the new electricity, WIPO Magazine (June 2019).

    [13] See Xiangxiang Ma, A Substantial Move to Advance AI Application in Pharmaceutical Industry — A Brief Analysis on the List of Typical Application Scenarios of Artificial Intelligence for Drug Governance (July 1, 2024),  https://www.lexiscn.com/mnl/detail.php?meta_content_id=3618.

    [14] See supra note 13.

    The Impact of Recent US Financial Institution Sanctions on Chinese Financial Institutions and Suggestions for Response

    The impact of US Presidential Executive Order No 14114 on Chinese financial institutions

    On 22 December 2023, the President of the United States signed Executive Order No 14114 to amend Executive Order No 14024 and Executive Order No 14068. Executive Order No 14114 authorises sanctions against foreign financial institutions that engage in or facilitate any significant transactions or transactions on behalf of or for the benefit of operators in the technology, defence, and related material sectors of the Russian Federation’s economy, as designated under Section 1(a)(i) of Executive Order No 14024, or in any other sector of the Russian economy as determined by the Secretary of the Treasury in consultation with the Secretary of State. It also targets those that engage in or facilitate significant transactions involving the Russian military-industrial complex or provide any services, including the sale, supply, or transfer of certain items or classes of items determined by the Secretary of the Treasury in co-ordination with the Secretary of State and the Secretary of Commerce, directly or indirectly to the Russian Federation.

    The term “foreign financial institution” as defined in Executive Order (EO) No 14114 refers to any foreign entity that is engaged in the business of:

    • accepting deposits;
    • making, granting, transferring, holding, or brokering loans or credits;
    • purchasing or selling foreign exchange, securities, futures or options; or
    • procuring purchasers and sellers thereof, as principal or agent.

    It includes:

    • depository institutions;
    • banks;
    • savings banks;
    • money services businesses;
    • operators of credit card systems;
    • trust companies;
    • insurance companies;
    • securities brokers and dealers;
    • futures and options brokers and dealers;
    • forward contract and foreign exchange merchants;
    • securities and commodities exchanges;
    • clearing corporations;
    • investment companies;
    • employee benefit plans;
    • dealers in precious metals, stones, or jewels; and
    • holding companies, affiliates, or subsidiaries of any of the foregoing.

    Regarding the so-called “significant transaction”, according to No 1151 of the Frequently Asked Questions of the Office of Foreign Assets Control (OFAC) of the US Treasury Department, OFAC may consider all facts and circumstances when determining whether one or more transactions are “significant”. Generally, the following factors can be partially or completely considered:

    • the size, number, and frequency of the transactions;
    • the nature of the transactions;
    • the level of awareness of management and whether the transactions are part of a pattern of conduct;
    • the nexus of the transactions to persons sanctioned pursuant to EO 14024, or to persons operating in Russia’s military-industrial base;
    • whether the transactions involve deceptive practices;
    • the impact of the transactions on US national security objectives; and
    • such other relevant factors that OFAC deems relevant.

    Therefore, if a Chinese financial institution’s client is an operator in the aforementioned specific industries or has engaged in any significant transactions involving the Russian military-industrial complex, the provision of services by the Chinese financial institution to that client, such as opening accounts for operators in specific economic sectors of the Russian Federation, both inside and outside of Russia, transferring funds, or providing other financial services, could very likely result in sanctions by the United States. Assisting companies or individuals in evading US sanctions against the Russian military-industrial complex could also result in sanctions, including helping to establish alternative or non-transparent payment mechanisms, altering or removing customer names or other relevant information from the payment field, obfuscating the true purpose of the payment or the payer, or taking measures to conceal the ultimate purpose of the transaction to evade sanctions. For foreign financial institutions that engage in the aforementioned actions, the United States can impose the following sanctions:

    • prohibit the opening of, or prohibit or impose strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States; or
    • block all property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of such foreign financial institution, and provide that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in.

    The impact of the US “Iran–China Energy Sanctions Act of 2023” on Chinese financial institutions

    On 23 April 2024, the “Iran–China Energy Sanctions Act of 2023” officially took effect. In fact, the “Iran–China Energy Sanctions Act of 2023” is an amendment to Section 1245(d) of the National Defense Authorization Act for Fiscal Year 2012, which “imposes sanctions on the Central Bank of Iran and other Iranian financial institutions”. Section 1245(d)(1)(A) of the National Defense Authorization Act for Fiscal Year 2012 authorises the President of the United States to impose sanctions on foreign financial institutions that knowingly engage in or facilitate any significant financial transactions with the Central Bank of Iran or other Iranian financial institutions designated by the Treasury Secretary, including prohibiting the opening of correspondent or payable-through accounts in the United States, prohibiting the maintenance of such accounts, or imposing strict conditions on the maintenance of such accounts.

    According to Section 1245(h) of the National Defense Authorization Act for Fiscal Year 2012, the United States Code, and the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, a “correspondent account” is an account established to accept deposits from a foreign financial institution, make payments on behalf of a foreign financial institution, or handle other financial transactions related to that institution. A “payable-through account” refers to an account opened by a foreign financial institution at a custodial institution, including transaction accounts, through which the foreign financial institution allows its customers to directly or through sub-accounts engage in banking activities related to US banking. The term “financial institution” includes:

    • insured banks;
    • commercial banks or trust companies;
    • private bankers;
    • foreign bank agencies or branches in the United States;
    • any credit union;
    • thrift institutions;
    • brokers or dealers registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934;
    • brokers or dealers in securities or commodities;
    • investment bankers or investment companies;
    • currency exchange, or businesses engaged in the exchange of currency, funds, or value that substitutes for currency or funds;
    • insurance companies; or
    • any business or agency that engages in any activity which the Secretary of the Treasury determines, by regulation, to be an activity which is similar to, related to, or a substitute for any activity in which any business described in this paragraph is authorised to engage.

    Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 does not further clarify the meaning of “significant financial transaction”. Through this amendment, the “Iran–China Energy Sanctions Act of 2023” further clarifies the meaning of “significant financial transaction”, with Article 2(2) stipulating that the “significant financial transaction” under Section 1245(d)(1)(A) of the National Defense Authorization Act for Fiscal Year 2012 includes the following two types of transactions:

    • any transaction in which a Chinese financial institution is involved in the purchase of Iranian oil or petroleum products; and
    • any transaction in which a foreign financial institution is involved in the purchase of Iranian unmanned aerial vehicles (UAVs), UAV parts, or related systems.

    It is noteworthy that the determination of the above two types of “significant financial transactions” does not take into account the size, quantity, frequency, or nature of the transaction.

    It can be seen that the United States has expanded the scope of sanctions that may be imposed on Chinese financial institutions through the “Iran–China Energy Sanctions Act of 2023”. Once the United States determines that Chinese financial institutions have knowingly engaged in or facilitated any transactions involving the purchase of Iranian oil or petroleum products and Iranian unmanned aerial vehicles (UAVs), UAV parts, or related systems, regardless of the size, quantity, frequency, or nature of the financial transaction, Chinese financial institutions may be subject to US sanctions, thereby being unable to open or maintain correspondent or payable-through accounts through US financial institutions in the United States. The risk of Chinese financial institutions being subject to US economic sanctions has further increased.

    Suggestions for Chinese financial institutions on responding to recent US sanctions against financial institutions

    Convey compliance expectations to clients

    • Convey the relevant sanctions compliance requirements and risks to clients, inform them not to use their accounts to conduct business with designated individuals in specified industries or engage in any transactions involving the Russian military-industrial complex or Iranian oil and UAVs.
    • Share the list of certain items or classes of items subject to sanctions legal control with clients engaged in import and export, manufacturing, or any other related businesses.

    Conduct due diligence and compliance review of clients and related business and transactions

    • Conduct due diligence and compliance review of clients and related business and transactions to determine whether there are clients operating in specific sectors of the Russian economy, any clients conducting business with designated individuals in specific industries, clients that may be involved in selling, supplying, or transferring certain items to Russia, and clients involved in transactions related to Iranian oil or petroleum products or Iranian unmanned aerial vehicles (UAVs), UAV parts, or related systems.

    It should be noted that compliance review should also be conducted for non-US dollar currency transactions. According to OFAC’s Frequently Asked Questions No 1151, the sanctions stipulated in Executive Order No 14114 and No 14024 also apply to non-US dollar currency transactions conducted by foreign financial institutions.

    Incorporate sanctions risks into client risk grading and take corresponding sanctions response measures

    • Include the risks of US sanctions against foreign financial institutions in the client risk grading criteria and take different measures for clients with different risk ratings.
    • For clients not engaged in activities subject to sanctions control, obtain written statements from the clients stating that they are not operating in the specified industries, have not sold or transferred specific items to Russia, have not engaged in any transactions involving the Russian military-industrial complex, and have not been involved in transactions related to Iranian oil, UAVs, or related systems.
    • For clients engaged in high-risk activities or those who have not responded to relevant investigations, appropriate restrictive measures should be taken. These measures include restricting accounts, limiting the types of business allowed to be conducted, strengthening control over trade financing for specific client projects, and placing clients or counterparties on an internal “do not engage” watchlist, among others.

    Effectively implement sanctions compliance frameworks in daily operations

    Financial institutions should effectively implement sanctions compliance frameworks in their daily operations. Firstly, financial institutions should develop and improve effective sanctions compliance frameworks. The top management should provide clear support for the development and implementation of compliance frameworks and ensure the provision of necessary resources to integrate compliance requirements into the daily operations of the organisation. On this basis, a comprehensive risk assessment should be conducted to systematically analyse customers, products, services, supply chains, intermediaries, and counterparties, in order to identify and quantify potential sanctions compliance risks.

    Based on the results of the risk assessment, design and implement internal control measures, including developing clear policies and procedures aimed at preventing, identifying, reporting, and documenting activities that may violate sanctions. In addition, establish a comprehensive, independent, and objective testing and auditing mechanism to ensure timely identification and remediation of weaknesses and deficiencies in the sanctions compliance framework. In order to enhance the compliance awareness and ability of employees, regular training programmes should be carried out to ensure that all relevant personnel understand the importance of sanctions compliance and are able to master specific knowledge and skills related to their responsibilities.

    Ensure clear communication of policies and procedures related to sanctions compliance framework to relevant personnel, and effectively integrate these policies and procedures into the daily operations of the company. In addition, it is advisable to establish clear records of the implementation and execution of the above matters, in order to face potential investigations and provide a basis for proving the compliance of institutional operations.

    Finally, given the constantly changing sanctions regulations and market environment, the sanctions compliance framework should be regularly reviewed and updated to ensure that it can adapt to the latest developments in the external environment, including updates in regulatory requirements, changes in business models, and new market trends. The risk of violating sanctions regulations can be effectively reduced through continuous self-assessment and improvement, and appropriate remedial measures taken when necessary.

    1. Trends and Overview

    1.1 Sanctions Market

    In the past 12 months, the sanctions sector has undergone significant changes and growth, with a notable increase in US sanctions imposed on Chinese companies. This surge reflects the escalating geopolitical tensions between the US and China. The US has broadened its scope of sanctions to include more Chinese entities, citing reasons such as national security threats and human rights concerns.

    The COVID-19 pandemic has further intensified the global geopolitical competition and strengthened the sanctions policy. This heightened competition has led to an even stronger reliance on sanctions as a policy tool. Governments have used sanctions to exert pressure on adversaries. However, the pandemic has also disrupted supply chains and affected international trade. These disruptions have the potential to impact the implementation and effectiveness of sanctions measures in turn.

    1.2 Key Trends

    The US has persistently ramped up its efforts to impose sanctions on Chinese technology companies, particularly focusing on those operating in sectors that are considered critical to national security. In response to these increasing pressures, China has been actively working to bolster its export control system. This involves the development and enforcement of stringent regulations that govern the transfer of sensitive technologies and dual-use items. China has also been proactively devising and implementing anti-sanctions measures to counteract the impact of such restrictions. These measures are designed to protect Chinese companies from the adverse effects of sanctions and to maintain the stability of the domestic market.

    1.3 Key Industries

    The semiconductor and chip manufacturing industries have been severely affected by sanctions. The US has imposed stringent restrictions on exporting advanced AI chips and semiconductor manufacturing equipment to China. This move has had far-reaching implications, particularly for Chinese technology giants that are heavily dependent on these high-tech components to manufacture cutting-edge products.

    In the telecommunications sector, the ripple effects of US sanctions have been equally pronounced. Chinese telecommunications equipment manufacturers, who are at the forefront of developing and deploying 5G technology, have found their growth prospects significantly constrained. The sanctions have imposed limitations on their ability to access vital components and technology that are essential for the advancement of 5G infrastructure and services.

    1.4 Overview

    1.4.1 Types of Sanctions

    The types of sanctions implemented in China include:

    • visa restrictions;
    • asset seizure and restrictions;
    • trade and transactions restrictions;
    • fines; and
    • other necessary measures as deemed necessary by relevant Chinese authorities.

    1.4.2 Scope of Sanctions

    China’s sanctions law does not explicitly state that it has an extra-territorial effect; Chinese citizens, legal persons and other organisations within China’s jurisdiction must comply with sanctions imposed by the Chinese government.

    1.4.3 Domestic and/or Supranational Measures

    China’s sanctions are imposed at a domestic level empowered by domestic legislation. For example, the Law of the People’s Republic of China on Countering Foreign Sanctions stipulates that China can take countermeasures against discriminatory restrictive measures imposed by foreign countries.

    On the other hand, China also implements those sanctions mandated by the UN Security Council. The Foreign Relations Law of the People’s Republic of China also provides a legal basis for the implementation and compliance of United Nations Security Council sanctions and related measures within China. Article 35 clearly stipulates that the state shall take measures to implement binding sanctions resolutions and related measures made by the United Nations Security Council under Chapter VII of the United Nations Charter.

    2. Overview of Regulatory Field

    2.1 Primary Regulators

    The Ministry of Commerce and the Ministry of Foreign Affairs are the primary regulators for Sanctions in China. The Ministry of Commerce is responsible for import and export controls and trade-related sanctions. The Ministry of Foreign Affairs is responsible for the country’s foreign policy, including sanctions against foreign entities and individuals. Depending on the nature of the sanctions, other state departments, such as the public security department, may also be involved in the implementation of sanctions.

    2.2 Enforcement

    2.2.1 Enforcement Responsibilities

    In China, the enforcement of sanctions is primarily the responsibility of various state-level authorities, which work in co-ordination to implement and oversee sanctions-related activities. Primarily, the Ministry of Commerce is responsible for the supervision of foreign trade and economic co-operation, including the development and implementation of export controls and unreliable entity lists related to sanctions. The Ministry of Foreign Affairs is responsible for announcing and interpreting China’s sanctions decisions, and conducting diplomatic negotiations with other countries.

    In addition, according to the Law of the People’s Republic of China on Countering Foreign Sanctions, the relevant departments of the State Council may decide to include individuals or organisations who directly or indirectly participate in the formulation, decision-making, and implementation of discriminatory restrictive measures as stipulated in this Law in the list of countermeasures. The determination, suspension, modification or cancellation of the list of countermeasures, and countermeasures themselves shall be announced by an order issued by the Ministry of Foreign Affairs or other relevant departments of the State Council. According to Article 10 of the Law of the People’s Republic of China on Countering Foreign Sanctions, China has established a co-ordination mechanism for anti-foreign sanctions work. The relevant departments of the State Council should strengthen co-ordination and information sharing, and determine and implement relevant countermeasures in accordance with their respective responsibilities and tasks.

    According to the Provisions on the List of Unreliable Entities, China has established a working mechanism with the participation of relevant departments of central state organs, responsible for organising and implementing the unreliable entity list system. The Office of Work Mechanism is located in the competent commerce department of the State Council.

    2.2.2 Breaching Sanctions

    According to the Law of the People’s Republic of China on Countering Foreign Sanctions, any organisation or individual that fails to implement or co-operate in implementing the countermeasures will be subject to legal liability in accordance with the law, which does not exclude criminal liability. For example, if the breach of sanctions endangers national security or involves the disclosure of state secrets, it could be subject to criminal liabilities under the “Criminal Law of the People’s Republic of China”.

    Pursuant to the Law of the People’s Republic of China on Countering Foreign Sanctions, organisations and individuals within China are obligated to follow the countermeasures determined by the relevant state departments. Failure to comply with these measures can lead to administrative liabilities, including orders to cease the activities, fines, and potential restrictions or prohibitions on related activities.

    2.2.3 Mitigation

    China’s sanctions law does not explicitly stipulate any mitigating steps which can be taken to avoid or lessen penalties imposed as a result of breach of the sanctions.

    If a Chinese entity is subject to administrative penalties for violating sanctions laws, according to the Administrative Penalty Law of the People’s Republic of China, if the illegal act is minor and corrected in a timely manner without causing harmful consequences, no administrative penalty shall be imposed. Those who violate the law for the first time with minor consequences and make timely corrections may not be subject to administrative penalties. If the Chinese entity has sufficient evidence to prove that there is no subjective fault, no administrative penalty shall be imposed. Those who actively eliminate or mitigate the harmful consequences of illegal acts, voluntarily confess to illegal acts that the administrative organ has not yet mastered, and who have made meritorious contributions in co-operating with the administrative organ in investigating and punishing illegal acts shall be given lighter or mitigated administrative penalties.

    If a Chinese entity is criminally punished for violating sanctions laws and constituting a crime, according to the Criminal Law of the People’s Republic of China, if the Chinese entity voluntarily gives up the crime or automatically and effectively prevents the consequences of the crime during the process of committing a crime, those who have not caused damage shall be exempted from punishment; if damage is caused, the punishment shall be reduced. Criminals who have mitigating circumstances as stipulated by law shall be sentenced to a punishment below the statutory penalty. Those who voluntarily surrender after committing a crime and truthfully confess their crimes are considered to have surrendered themselves. For criminals who surrender themselves, the punishment may be lighter or mitigated; those who commit minor crimes may be exempted from punishment. Criminals who have exposed the criminal behaviour of others, which has been verified to be true through investigation, or who have provided important clues that have enabled investigators to solve other cases, etc, may be given lighter or mitigated punishment; those who have made significant contributions may have their punishment reduced or exempted.

    2.2.4 “Strict Liability”

    According to the Law of the People’s Republic of China on Countering Foreign Sanctions, if foreign countries violate international law and basic norms of international relations, use various pretexts or, based on their own laws to contain and suppress China, take discriminatory restrictive measures against Chinese citizens and organisations, and interfere in China’s internal affairs, China has the right to take corresponding countermeasures.

    The unreliable entity list mechanism under the Provisions on the List of Unreliable Entities targets foreign entities engaged in harming China’s national sovereignty, security, and development interests, or violating normal market trading principles, interrupting normal transactions with Chinese entities, or taking discriminatory measures against Chinese entities, seriously damaging the legitimate rights and interests of Chinese entities. The working mechanism will make a decision on whether to include the relevant foreign entities in the list of unreliable entities considering the degree of harm to China’s national sovereignty, security, and development interests, the degree of damage to the legitimate rights and interests of Chinese entities and whether it complies with international trade and economic rules.

    In short, whether the foreign entities conduct the above behaviours out of intent or negligence is not considered by the authorities according to the above-mentioned provisions.

    2.3 Licensing

    2.3.1 Derogation

    There is no licence permitting derogation from sanctions currently under sanctions law in China. The sanctions decisions made according to the Law of the People’s Republic of China on Countering Foreign Sanctions are final.

    However, according to the Provisions on the List of Unreliable Entities, a correction deadline can be set for foreign entities included in the list of unreliable entities, during which no sanction measures will be taken. Foreign entities could be removed from the list of unreliable entities if they correct their behaviours and take measures to eliminate the consequences within the correction period.

    2.3.2 Provision of Legal Services

    There is no general licence for the provision of legal services to designated persons currently under sanctions law in China. However, according to the Provisions on the List of Unreliable Entities, during the investigation conducted by the working mechanism, foreign entities may make statements and defend themselves.

    2.4 Reporting

    There is no explicit reporting obligations of sanctions violations currently under sanctions law in China. However, citizens and organisations shall report activities endangering China’s national sovereignty, security, and development interests stipulated in the Provisions on the List of Unreliable Entities since they have the obligation to report clues in a timely manner that endanger national security activities to the state security organisation according to the National Security Law of the People’s Republic of China.

    According to the Provisions on the List of Unreliable Entities, the working mechanism shall decide whether or not to investigate the acts of relevant foreign entities according to its functions and powers or the suggestions or reports from relevant parties.

    The Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures issued by the Ministry of Commerce of China requires Chinese entities to truthfully report to the competent commerce department of the State Council within 30 days when encountering situations where foreign laws and measures prohibit or restrict their normal economic and trade activities with third countries (regions) and their citizens, legal persons, or other organisations.

    3. Recent and Future Legal Developments

    3.1 Significant Court Decisions or Legal Developments

    On 10 June 2021, the Law of the People’s Republic of China on Countering Foreign Sanctions officially came into effect, specifying the situations in which China has the right to take countermeasures, including:

    • foreign countries violating international law and basic norms of international relations, using various excuses or, based on their own laws to contain and suppress China, adopting discriminatory restrictive measures against Chinese citizens and organisations, and interfering in China’s internal affairs; or
    • foreign countries, organisations, or individuals committing, assisting, or supporting actions that endanger China’s sovereignty, security, and development interests.

    On 1 July 2023, the Foreign Relations Law of the People’s Republic of China began to be implemented officially. According to Article 33, China has the right to take corresponding countermeasures and restrictive measures against actions that violate international law and basic norms of international relations and endanger China’s sovereignty, security, and development interests.

    On 1 January 2024, the new Civil Procedure Law of the People’s Republic of China came into effect. Article 300 stipulates that if a court determines that an effective judgment made by a foreign court violates the basic principles of the laws of the People’s Republic of China or national sovereignty, security, or social public interests, it shall rule not to recognise and enforce it.

    3.2 Future Developments

    The US has been known to implement economic sanctions that can affect trade with China. There is a trend where sanctions are increasingly targeting technology and innovation sectors. The US has been expanding its controls on exports to China, particularly in high-tech sectors, and has been adding Chinese entities to its Entity List, which restricts their access to US technology and components without a licence. Companies in these sectors should be particularly vigilant and may need to invest in domestic R&D to reduce reliance on imported technology.

    There is another trend in the US sanctions regime, particularly focusing on the activities of foreign financial institutions and the expansion of the US government’s authority to impose sanctions on Chinese financial institutions through provisions like Executive Order No 14114 which amends previous orders to target a broader range of transactions and entities, or the Iran–China Energy Sanctions Act of 2023 explicitly defining what constitutes a “significant financial transaction”. This reflects a trend towards a more assertive and comprehensive approach to economic sanctions, with a focus on deterring activities that support Russia and Iran.

    China has been active in refining its export control laws and implementing anti-sanctions measures to protect its national interests and the legitimate rights and interests of its companies. The introduction of the Unreliable Entity List is a strategic move to counteract measures that harm Chinese companies. China will continue to formulate necessary administrative regulations and departmental rules, establish corresponding work systems and mechanisms, strengthen departmental co-ordination, and determine and implement relevant countermeasures and restrictive measures against actions that endanger China’s sovereignty, security, and development interests.

    Clients looking to do business in China should closely monitor these trends and work with legal and trade compliance experts to navigate the complex landscape of international sanctions and trade controls. It is also important to engage in proactive risk management and to be prepared for the potential impacts of sanctions on business operations.

    4. Delisting Challenges

    4.1 Process

    According to the Provisions on the List of Unreliable Entities, a correction deadline can be set for foreign entities included in the list of unreliable entities, during which no sanction measures will be taken. Foreign entities could be removed from the list of unreliable entities if they correct their behaviours and take measures to eliminate the consequences within the correction period. During the investigation conducted by the working mechanism, foreign entities may make statements and defend themselves.

    If a foreign entity is restricted or prohibited from engaging in import and export activities related to China, and Chinese enterprises, other organisations or individuals need to conduct transactions with the foreign entity under special circumstances, they can apply to the Office of the Working Mechanism, and with consent, they can conduct corresponding transactions with the foreign entities.

    4.2 Remedies

    The working mechanism under the Provisions on the List of Unreliable Entities can decide to suspend or terminate the investigation based on the actual situation; if there is a significant change in the facts on which the decision to suspend the investigation is based, the investigation may be resumed.

    The working mechanism may decide to remove the relevant foreign entities from the list of unreliable entities based on the actual situation. If a foreign entity corrects its behaviour and takes measures to eliminate the consequences of its behaviour within the specified correction period in the announcement, the working mechanism shall make a decision to remove it from the list of unreliable entities. Foreign entities can apply to be removed from the list of unreliable entities, and the working mechanism will decide whether to remove them based on the actual situation.

    4.3 Timing

    The Provisions on the List of Unreliable Entities do not specify a time limit to obtain de-listing. However, the decision to remove foreign entities from the list of unreliable entities should be announced. From the date of announcement, the sanctions measures taken in accordance with the Provisions on the List of Unreliable Entities shall cease to be implemented.

    5. cTrade and Export Restrictions

    5.1 Services

    China’s export or import control regimes are currently not country-specific. The Ministry of Commerce release the Catalogue of Technologies Prohibited or Restricted from Exporting in China and the Catalogue of Technologies Prohibited or Restricted from Importing in China, regularly.

    China implements sanctions mandated by the UN Security Council towards the Islamic State and Al-Qaeda, Yemen, Iraq, the Democratic Republic of Congo, South Sudan, Libya, Mali, Haitian gangs, Central Africa, and Al-Shabaab in Somalia.

    5.2 Goods

    China’s export and import control regimes are currently not country-specific. The Ministry of Commerce, the General Administration of Customs, and the Ministry of Ecology and Environment, in accordance with relevant laws and regulations, release the Catalogue of Prohibited Import Goods and the Catalogue of Prohibited Export Goods, regularly.

    China implements sanctions mandated by the UN Security Council towards the Islamic State and Al-Qaeda, Yemen, Iraq, the Democratic Republic of Congo, South Sudan, Libya, Mali, Haitian gangs, Central Africa, and Al-Shabaab in Somalia.

    6. Civil Litigation and Arbitration

    6.1 Force Majeure

    1. In a case of a Sales Contract Dispute, the seller, Company A, signed a procurement contract with the buyer, Company B, and Company A promised in Annex 3 that the goods did not come from Iran. Afterwards, Company B refused to make payment since Company A was unable to provide proof, while Company A filed a lawsuit claiming that Annex 3 violated the Law of the People’s Republic of China on Countering Foreign Sanctions and the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures, violated mandatory provisions of laws and administrative regulations, and should be deemed invalid.

    The court found that the statement was a unilateral commitment issued by Company A to Company B which should be considered as a true expression of Company A’s intention. Secondly, the main content of this document is that Company A promised that the goods did not come from Iran, not falling within the scope of the Law of the People’s Republic of China on Countering Foreign Sanctions and the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures. Therefore, Company A’s inability to provide relevant supporting documents to prove to Company B as to the source of the goods involved in the case constitutes a breach of contract.

    2. In a case of applying for recognition and enforcement of foreign arbitral awards, Company C applied to the court for recognition and enforcement of an arbitration award made by the Singapore International Arbitration Centre Arbitration Tribunal. The respondent, Company D, requested the court not to recognise and enforce the arbitration award because the law firm to which the chief arbitrator belongs has been sanctioned by the Chinese government, resulting in the arbitration award being unfair.

    Regarding the issue of whether the sanctions imposed by the Chinese government on the law firm to which the arbitrator belongs will affect the hearing of this case, the court believes that the sanctions are aimed at the law firm to which the chief arbitrator belongs and not at its arbitrator’s identity. This sanction is not within the scope of non-recognition as stipulated in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, is not related to the trial of this case, and there was no improper procedure. The issue of whether the recognition and enforcement of arbitration awards comply with the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures is also not related to this case, and the choice of arbitration is the result of the autonomy of the parties in this case.

    The court ultimately held that the award made by the Singapore International Arbitration Centre in question did not fall under the circumstances of non-recognition and enforcement under Article 5 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and shall be recognised and enforced.

    3. In conclusion, PRC courts tend to respect the autonomy of the contracting parties regarding the agreement of sanctions or export control terms on the condition that sanctions or export control terms do not fall within the jurisdiction of the PRC sanctions laws, including but not limited to the Law of the People’s Republic of China on Countering Foreign Sanctions, the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures, and the Export Control Law of the People’s Republic of China.

    6.2 Enforcement

    In judicial practice, PRC courts tend to evaluate whether sanctions constitute force majeure. That is to say courts tend to evaluate whether the obstacles cannot be reasonably foreseen at the time of contract formation and the consequences of obstacles cannot be reasonably avoided or overcome by the affected parties. If they do not constitute force majeure, the judgment should be executed accordingly. If the judgment or ruling is not voluntarily complied with, the court may take measures to enforce its decision.

    If the property of the person subject to enforcement within China has been pre-sealed, seized, or frozen by relevant Chinese departments in accordance with sanctions laws, and no property available for enforcement has been found through property investigation, the enforcement procedure may be terminated after the applicant for enforcement signs confirmation or the enforcement court forms a collegial panel to review and verify, and is approved by the President. After the termination of enforcement, if the applicant for enforcement discovers that the enforcee has property available for enforcement, they may apply for enforcement again.

    7. Designation, Compliance and Circumvention

    7.1 Executive Body

    According to the Provisions on the List of Unreliable Entities, China has established a working mechanism with the participation of relevant departments of central state organs, responsible for organising and implementing the unreliable entity list system. The Office of Work Mechanism is located in the competent commerce department of the State Council.

    According to the Law of the People’s Republic of China on Countering Foreign Sanctions, the relevant departments of the State Council may decide to include individuals or organisations who directly or indirectly participate in the formulation, decision-making, and implementation of discriminatory restrictive measures as stipulated in this Law in the list of countermeasures. The determination, suspension, modification or cancellation of the list of countermeasures, and countermeasures shall be announced by an order issued by the Ministry of Foreign Affairs or other relevant departments of the State Council.

    7.2 Scope of Designation

    There are similar provisions in China specifying the indirect designation of persons as a result of them being “owned or controlled” by a directly designated person. According to the Law of the People’s Republic of China on Countering Foreign Sanctions, the relevant departments of the State Council may decide to take countermeasures against the following individuals and organisations.

    • Spouses and immediate family members of individuals included in the list of countermeasures.
    • Senior management personnel or actual controllers of organisations included in the list of countermeasures.
    • Organisations where individuals listed on the countermeasures list serve as senior management personnel.
    • Organisations that are actually controlled, or involved in the establishment and operation, by individuals and organisations included in the countermeasures list.

    7.3 Circumvention

    7.3.1 Prohibiting Provisions

    According to the Law of the People’s Republic of China on Countering Foreign Sanctions, organisations and individuals within China shall implement countermeasures taken by relevant departments of the State Council, and otherwise they shall be dealt with by relevant departments of the State Council in accordance with the law, and their activities shall be restricted or prohibited.

    Any organisation or individual that fails to implement or co-operate in implementing countermeasures shall be held legally responsible in accordance with the law.

    7.3.2 Criminal Penalties

    If the circumvention of sanctions endangers national security or involves the disclosure of state secrets, it could be subject to criminal liabilities of life imprisonment or imprisonment for more than ten years under the Criminal Law of the People’s Republic of China.

    According to the Law of the People’s Republic of China on Countering Foreign Sanctions, no organisation or individual shall enforce or assist in enforcing discriminatory restrictive measures taken by foreign countries against Chinese citizens and organisations. If an organisation or individual conducts those behaviours and infringes upon the legitimate rights and interests of Chinese citizens or organisations, Chinese citizens or organisations may file a lawsuit with the People’s Court, demanding that they stop the infringement and compensate for the losses. Those who have the ability to execute judgments or rulings of the people’s court but refuse to do so, while the circumstances are serious, shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention, or a fine. If the circumstances are particularly serious, the organisation or individual shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years and shall also be fined.

    On July 30, 2024, China’s merger control authority, the State Administration for Market Regulation (“SAMR”), released its official statistics on the merger review cases in China in the first half of 2024. This note outlines the key statistics published by SAMR and extracts a few implications thereon for companies that keep an eye on China’s merger control practice.

    1. SAMR Concluded 297 Cases in the First Half of 2024

    According to the official release, SAMR concluded review of 297 concentration notifications in the first half of 2024, of which 282 were approved unconditionally. In addition, 14 concentration notifications were withdrawn by the filing party after SAMR’s formal acceptance. Up to date in 2024, there is only one remedy case released by SAMR, which is JX Nippon Mining & Metals Corporation’s acquisition of shares in Tatsuta Electric Wire & Cable Co., Ltd.

    Notably, compared to the 797 cases totally reviewed by SAMR in 2023, the case number of the first half of 2024 is less than half of the total number of cases in 2023. This may be partly due to the significant increase in the turnover threshold released by SAMR in January 2024. 

    2. Vast Majority of Simplified Cases

    Among the 297 concluded cases, the vast majority fall into the category of simplified cases, which were reviewed under the simplified review procedure and were approved in the preliminary review stage (“phase I”), namely within 30 days after formal acceptance. Specifically, a total of 262 cases of concentration of undertakings were reviewed under the simplified procedure, accounting for about 88%, with 256 cases closed in phase I, accounting for approximately 86%. That means only six simplified cases were not approved within 30 days after the formal acceptance of SAMR, indicating that most simplified cases could be given the green light within 30 days after acceptance. Taking account of the pre-acceptance review that usually takes around two to four weeks, the total merger review time for simplified cases in China averages around 6 weeks.

    3. Foreign-to-Foreign Deals Still Accounted for A Fair Share

    From the perspective of concentration types, there are a significant number of domestic deals alongside a considerable number of foreign-to-foreign transactions. Though the concentration notifications for transactions between purely domestic companies account for the biggest portion, with 170 cases in total accounting for approximately 57%, there is still a fair share of notifications for foreign-to-foreign deals, with 89 cases accounting for roughly 30%. The remaining is 38 concentrations between domestic and foreign enterprises, accounting for about 13%.

    It is notable that foreign-to-foreign deals are also caught by China’s merger control regime as long as they amount to concentration under the Anti-Monopoly Law of China and reach the statutory filing threshold. Although foreign-to-foreign deals face lower risks of being investigated for gun-jumping compared to domestic deals in practice, it is observed that foreign companies are increasingly attentive to merger filing obligations in China, as China has become the third largest antitrust jurisdiction worldwide. This trend could be reflected in the above-mentioned case number related to foreign-to-foreign deals.

    4. Horizontal Mergers Prevailed and Equity Acquisition Remained the Primary Transaction Mode

    In the first half of 2024, there are 168 horizontal mergers between competitors, accounting for approximately 57%; 114 cases are associated with the vertical relationship, accounting for about 38%; and there are 109 conglomerate mergers without any horizontal or vertical relationships, accounting for roughly 37%. 156 concentrations take the form of equity acquisition, accounting for approximately 52%, whereas 145 concentrations are in the form of joint ventures, accounting for approximately 49%.

    Notably, in the middle of June 2024, SAMR has released the exposure draft for the Guidance for Review of Horizontal Concentrations to solicit public comments. The fact that SAMR has at first drafted the guidelines for horizontal mergers, rather than their vertical or conglomerate counterparts, is possibly due to the prevalence of horizontal mergers in its merger review practice.  

    5. Transactions in Manufacturing Sectors Account for Highest Case Number

    Regarding the industries involved in those 297 cases being reviewed by SAMR in the first half of 2024, most of them relate to the real economy and sectors involving people’s livelihood. The manufacturing industry in the real economy has the highest number of cases, with 101 cases, accounting for approximately 34%. Other industries with high transaction volumes include water, electricity, gas, and heat production and supply, wholesale and retail, finance, real estate, information technology services, transportation, etc.

    From the perspective of segmented industry categories, electrical machinery and equipment of the manufacturing industry has the highest number of cases with 19, accounting for about 19% of the total number of manufacturing cases. Other segmented sectors with a high number of cases include computer and electronic equipment manufacturing, chemical raw material and chemical product manufacturing, automobile manufacturing, pharmaceutical manufacturing, etc.

    In summary, this briefing provides an overview of China’s merger control practice in the first half of 2024 together with some implications, for the reference of companies that have dealings with such an area. We are closely monitoring any trends, developments and changes in China’s merger control regime and will provide further updates in the future.

    “Fork in the Road” (“FITR”) clauses, included in significant investment treaties, “provide that the investor must choose between the litigation of its claims in the host State’s domestic courts or through international arbitration and that the choice, once made, is final”.[1]  Hence, the fork in the road clauses result in that the investor has a choice of forum that is irrevocable.[2]

    For a long time, Fork in the Roadclauses have remained dormant within international investment law (“IIL”). It was not until 2009 that the sole arbitrator, Jan Paulsson, in Pantechniki v. Albania for the very first time, declined his jurisdiction on the basis of the FITR clause contained in the Albania-Greece BIT.[3] When it came to the application of the FITR clause, Mr. Jan Paulsson invested his emphasis on the normative sources of the claims concerned and the question of whether the claim brought before the investor-state arbitral tribunal has an “autonomous existence” from the claim submitted to the other court or arbitral tribunal instead of merely focusing on whether the dispute brought before the investor-state arbitral tribunal and the dispute submitted to another court or tribunal are the same. However, such an approach did not gain widespread acceptance, as many other tribunals continued to adhere to a rigid and formalistic interpretation regarding the application of FITR clauses.

    In this article, three recent Chinese cases in relation to the application of the FITR clause will be examined. Based on these examination, we will then subsequently discuss why the emphasis regarding the FITR clause should be shifted from formalism to substantialism.

    The Origin and Objectives of FITR Clauses

    The increasing number of bilateral investment treaties (“BITs”), multilateral investment agreements and other international conventions provide the cross-border investors with ample instruments to seek remedies in cases where their rights and investments have been infringed by host states. However, when observed from the perspective of host states, the landscape of investor-State dispute settlement (“ISDS”) undergoes a significant transformation. Host states have increasingly found their measures and policies subject to the scrutiny of international tribunals, and the local courts’ jurisdiction over certain investment disputes arising out of foreign direct investment are frequently exercised by these international tribunals.

    The ever-lasting struggle between the investors’ demands for international remedy and the host states’ insistence on sovereignty eventually gave birth to the FITR clause which can be found in most investment treaties nowadays. Within the envisagement of the drafters, this clause, as a compromised solution, is anticipated to serve, at least, two main purposes: to harmonize the different interests surrounding the ISDS; and to address the concerns of re-litigation or parallel proceeding and the potentially ensuing conflicting outcomes. However, as the following three cases would reveal, the FITR clause has significantly deviated from its intended purposes due to the rigid and formalistic approach adopted by international tribunals.

    Three Chinese Cases Pertaining to the Application of the FITR Clause

    On 26 March 2021, a three-member tribunal issued an award in Zhongshan Fucheng v. The Federal Republic of Nigeria. In this award, the arbitral tribunal rejected the jurisdictional objection raised by Nigeria on the basis of the FITR clause. Subsequently, on 10 January 2022, another tribunal, in the case of Wang Jiazhu v. Republic of Finland, ruled against Finland’s jurisdictional objection on the grounds that the FITR clause is inapplicable in the current case. One year later, on 16 February 2023, in the case of Asiaphos Limited and Norwest Chemicals v. People’s Republic of China, the tribunal came with a majority award in favour of China and this award, once again, touched upon the issue of FITR-based jurisdictional objection.

    Despite the varying merit issues addressed in the aforementioned three Chinese-related Investment-Treaty cases, the tribunal in each case faced a shared procedural issue, namely, FITR-based jurisdictional objection. Ultimately, all three tribunals arrived at a consistent determination regarding the effect of the FITR clause. In light of this, the tribunals’ findings concerning the application and effect of the FITR clause deserve close attention.

    Zhongshan Fucheng v. The Federal Republic of Nigeria[4]

    In this case, the dispute concerns the unilateral termination by the Nigerian Ogun State of the joint venture agreement (“JVA”) signed with Zhongfu, a subsidiary of the Chinese company Zhongshan Fucheng (“Zhongshan”). The Claimant alleged that Nigeria had thereby breached its obligations under the China-Nigeria BIT (2001)[5] and commenced the arbitration. During the arbitral proceeding, Nigeria invoked the FITR clause on the basis that Zhongfu had previously opted to initiate legal proceedings in the state court against Ogun State. As a result, this invocation triggered the application of the FITR clause and thereby prohibited Zhongshan from pursuing the international arbitration proceeding.

    In detail, the tribunal primarily relied on the “triple identity tests”,which requires tribunal to determine whether claim is the same from parties, course of action, and relief sought, in reaching its decision. First, the parties are different as neither of the parties, Zhongshan and Nigeria in this arbitration, is party to the court proceedings where Zhongshan’s subsidiary Zhongfu and Nigerian Ogun State are involved. Secondly, the course of action is different as the court proceedings are based on the alleged breaches of JVA and domestic law while this arbitration is based squarely on China-Nigeria BIT (2001). Thirdly, the relief sought is different as in the court proceedings Zhongfu seeks declaratory and injunctive relief, whereas in this arbitration, Zhongshan seeks compensation.

    Based on the tribunal’s reasoning, concerns may arise that under the well-established and widely accepted “triple identity tests”, investors could potentially gain a significant advantage or even end up being invincible when confronted with the FITR-based jurisdictional objections raised by host states. One could reasonably imagine that initiating legal proceedings against the host state in its own courts, based on the provisions of the BIT can be challenging or practically impossible.

    Wang Jiazhu v. Republic of Finland [6]

    This arbitration was brought by the Claimant against the Republic of Finland and concerned the latter’s alleged extensive raid of Claimant’s investment center, the subsequent detention of Claimant and the effective appropriation of Claimant’s investments in Kouvala Finland.

    It is noteworthy, prior to the commencement of the arbitration, Claimant has originally chosen to submit the dispute at hand to the competent courts of Finland. Starting from 13 June 2013, the Claimant’s domestic legal proceedings went through the District Court, then the Court of Appeal and finally reached to the Finish Supreme Court. In this regard, Finland raised the FITR-based jurisdictional objections, arguing that under Article 9 of the China-Finland BIT (2004)[7], a typical FITR Clause, the Claimant no longer have recourse to international arbitration.

    In the Ruling on Respondent’s Jurisdictional Objection issued by the Tribunal on 10 June 2022, the Tribunal concluded that the Republic’s Jurisdictional Objection failed and therefore proceeded to a consideration of the merits claims raised by the Claimant. Among this 12 pages ruling, one key finding raised by the Tribunal is that the significant factual basis relied upon by the Claimant during the arbitration is his denial of justice claim. To be more specific, Claimant alleged that throughout the ruling and adjudication of Claimant’s Tort Claims heard in the Finland domestic courts, the courts had failed to give sufficient reasoning or neglected to address key issues. Such actions committed by the domestic courts fell within the scope of issues concerning fair and equitable treatment to investor during investmentand further gave rise to the Claimant’s denial of justice claim.

    Though Claimant had also initiated other claims such as protection and security, protection against expropriation which were likely to be overlapped with the claims raised in domestic courts, the very nature of the denial of justice claim eventually enabled the Claimant to circumvent the application of FITR clause. Because at the time when the Tort Claims were heard, the alleged denial of justice committed by the domestic court had not yet occurred. This case was settled on 24 October 2023, but an interesting hypothetical question worth considering. If the Tribunal later determines the denial of justice claim should be dismissed after considering the merits, would they revisit the jurisdictional aspects of the dispute and invoke the FITR clause? This issue appears to be insurmountable in practical application. Since it is commonly recognized that tribunal, especially international tribunal constituted based on treaty, has the power of competence-competence to determine its own jurisdiction, it has wide discretion to decide whether to deal jurisdiction issue in merits or not. Once the objection to FITR jurisdiction is adjudicated concurrently with the merits, the host state will largely be compelled to become involved in the substantive defense of the case.

    Asiaphos Limited and Norwest Chemicals v. People’s Republic of China[8]

    If the Zhongshan case stands for a prevailing view on how to interpret the FITR clause in international investment law, the Asiaphos case serves as a unique example, from the host state’s perspective, providing guidance to investors on how to circumvent one.

    The dispute of this case relates to the shutdown, sealing and mandatory “exit” of investors’ mines and associated mineral rights as China adopted a new policy which prohibited mining in and around the nature reserve. The Claimants initiated this arbitration primarily alleging the state’s new policy has expropriated investors’ investment which led to the violation of the Singapore-China BIT (1985)[9]. The core issue pertains to the determination of the scope of the state’s arbitral consent on the basis of article 13 (3) of the BIT “if a dispute involving the amount of compensation resulting from expropriation [……], it may be submitted to an international tribunal established by both parties”. The FITR clause, in this case, plays a significant role in the interpretation of the terms “dispute involving the amount of compensation resulting from expropriation”.

    To establish the Tribunal’s jurisdiction to hear the dispute not only the compensation resulting from the expropriation but also the existence and lawfulness of the expropriation, Claimants advocated that these two issues were inseparable and if Claimants are required to first file a claim in the court proceedings regarding the existence of an expropriation, then it would be precluded from seeking recourse to international arbitration regarding the compensation because of the FITR clause. Contrary to the Claimants’ position, the host state argued that the FITR clause would not be triggered if the domestic litigation is appropriately filed. The Tribunal eventually adopted the state’s position and elaborated that the investors could limit their request for relief before the national court to the question of legality of the measure in dispute and defer the question of appropriate amount of compensation to the subsequent arbitral proceedings. Then there would be no risk of triggering the FITR clause and giving rise to contradicting decisions as the two proceedings deal with different issues.

    Inspired by the Tribunal’s above reasoning, the investors in other cases may utilize the tactic of “claim-splitting”, which is dividing a single cause of action or claim into multiple ones and pursuing each one separately in different legal proceedings, to easily avoid triggering the FITR clause and then having a second bite at the cherry. In the end, the tribunal may find the award’s initial purpose of avoiding parallel proceedings and the ensuing contradictory decisions is satisfied at the cost of rendering the finality of the results of dispute settlement moot.

    Concluding thought: shifting the Emphasis from Formalism to Substantialism

    Overall, the aforementioned three cases primarily adhere to the “triple indentity test” method to determine whether the FITR provisions should be triggered. However, Before deciding whether such test should be applied to interpret FITR clauses or not, the very fundamental issue to solve is determining which rules to be applied. Since FITR clauses are treaty texts, Vienna Convention on the Law of Treaties (“VCLT”) is of certain to govern, of which Art. 31 referring that object purpose are to be considered when interpreting treaty texts gives a guideline to follow. In this regard, any test adopted by the tribunal should not deviate from the requirements regulated by VCLT. It is not difficult, however, to determine the actual role played by FITR clauses. As illustrated at the beginning of this article and has been observed by the ICSID tribunal in H&H v. Egypt, the purpose of a FITR provision is “to ensure that the same dispute is not litigated before different fora.”[10] i.e., to avoid parallel proceedings, where Claimant would enjoy second opportunity to present their cases. Thus, conclusion can be drawn that FITR clauses are drafted to prevent various detrimental effects of parallel proceedings and balance unequal position between host state and investor.

    Based on the foregoing analysis, the formalistic approach exemplified by the triple identity test exhibits significant deficiencies, rendering the application of the FITR clause virtually impossible. It is self-evident that investor-state arbitration is initiated based on treaty (namely treaty claim), while picture is far different in domestic litigation or arbitration, where majority of them are initiated solely and squarely based on domestic law or contracts (namely contract claim). If triple identity test is to be strictly followed, a foreseeable result is that FITR clause would enter a dormant state, which is also in violation of the interpretive principle of effectiveness.[11]

    Let’s revisit interpretation method provided in VCLT, since ordinary meaning of FITR clauses in many BITs are neutral, triple identity test is then applied as a supplementary tool to assist the tribunal determining the application of FITR clauses. However, This method of interpretation appears to have produced a contrary effect in practice, resulting in investor easily evading application of FITR clauses and having a second bite of the apple to present their case in different forums. Such interpretation is evidently contrary to the object and purpose of the FITR clauses.

    Standing in the current era of expanded ISDS and ample remedies available for investors, it is therefore of significant importance to shift the emphasis from a rigid formalistic identity test to a substantial overall assessment of the parties involved, the legal grounds invoked, the objects pursued and underlying facts or a measures/injuries oriented approach. With this transformation, a tribunal is required to dig deeper to find out whether the measure, adopted by the host state, which gives rise to the investors’ claim or the injury that formed the foundation of the claim, is the same in both proceedings.

    For example, if an investor pursues a case in domestic court proceedings seeking restitution in integrum for alleged expropriation by the host state based on contractual obligations, but subsequently seeks compensation in international proceedings relying on a BIT, the tribunal is expected to conduct a comprehensive and fact-intensive analysis to determine whether in both cases, the measures claimed or the injuries suffered by the investor are identical, i.e., both lead to host state’s commitment of expropriation. If the determination is affirmative, it is much likely that the FITR clause would be triggered.

    Undoubtedly, the real case presented before the tribunal would be much more complicated. However, it is only when the emphasis regarding the FITR clause is shifted from formalism to substantialism that the two main purposes surrounding this clause can be truly satisfied.


    [1] Dolzer, R. and Schreuer, C., Principles of International Investment Law, Oxford University Press, 2nded., 2012, p. 267.

    [2] Billiet, J.,International Investment Arbitration: A Practical Handbook, 2016, pp. 187-188.

    [3] Pantechniki S.A. Contractors & Engineers (Greece) v. The Republic of Albania, Award, ICSID Case No. ARB/07/21

    [4] Zhongshan Fucheng v. The Federal Republic of Nigeria, Award, Case 1:22-cv-00170.

    [5] China-Nigeria BIT (2001)

    available at: https://www.italaw.com/sites/default/files/laws/italaw170107.pdf

    [6] Wang Jiazhu v. Republic of Finland, Ruling on Respondent’s Jurisdictional Objection.

    [7] China-Finland BIT (2004), available at China – Finland BIT (2004) | International Investment Agreements Navigator | UNCTAD Investment Policy Hub

    [8] AsiaPhos Limited and Norwest Chemicals Pte Ltd v. People’s Republic of China, Award, ICSID Case No. ADM/21/1.

    [9] Singapore-China BIT (1985), available at China – Singapore BIT (1985) | International Investment Agreements Navigator | UNCTAD Investment Policy Hub

    [10] H&H Enters. Invs., Inc. v. Arab Republic of Egypt, Award, ICSID Case No. ARB/09/15.

    [11] For a discussion of the meaning and scope of the principle of effectiveness, see Richard K. Gardiner, Treaty Interpretation, pp. 66-68 (2d ed. 2015).

    1. Introduction

    For most plaintiffs and claimants, initiating dispute resolution process or achieving favorable judgment or arbitral award is not always the ultimate goal. The fundamental value of the dispute resolution process lies in obtaining the recoveries through such mechanisms. However, in international arbitration, which can often span several years, respondents may transfer their assets immediately to avoid any potential enforcement against them upon receiving the notice of arbitration if their assets have not been preserved in advance. As a result, even if the applicant can obtain favorable arbitration award and enforce such award, it may find itself in the awkward position of being unable to realize any meaningful recoveries by enforcing such award, thus failing to convert it into actual remedies.

    As it typically involves complex coordination mechanisms across multiple jurisdictions and integration of judicial enforcement measures with arbitration procedures, asset preservation in international arbitration, especially pre-arbitration preservation, has always been a challenging issue. Particularly, it remains challenging for parties in most international arbitrations seated outside mainland China to apply for asset preservation in mainland China. From a global perspective, only parties in arbitration seated in Hong Kong or Macau can relatively smoothly apply for asset preservation in mainland China due to the special arrangements between mainland China and the Special Administrative Regions.

    Since Hong Kong has long been a leading international arbitration center around the world, channels for asset preservation for Hong Kong seated arbitration have played a more significant role in practice. We will take the Hong Kong International Arbitration Centre (the “HKIAC”) as an example in this article to analyze the rules and practices of pre-arbitration asset preservation in mainland China for Hong Kong seated arbitration.

    2. Potential Approaches for Pre-Arbitration Asset Preservation

    Within the current regulatory framework, there could be two potential approaches for applicants wishing to preserve respondent’s assets located in mainland China before initiating arbitration with the HKIAC: the first is to apply to the People’s Courts of mainland China through HKIAC for asset preservation under the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the HKSAR (the “Mutual Assistance Arrangement”); the second is to initiate the Emergency Arbitrator Procedure in HKIAC.

    2.1 Apply for Pre-Arbitration Asset Preservation under the Mutual Assistance Arrangement

    According to the Mutual Assistance Arrangement, parties to “Hong Kong Arbitration” can apply for asset preservations, through the arbitration institution, with mainland China Intermediate People’s Courts before the arbitral award is rendered, referencing the provisions of the PRC Civil Procedure Law, the PRC Arbitration Law, and relevant judicial interpretations.

    The Mutual Assistance Arrangement defines “Hong Kong Arbitration” as arbitration seated in Hong Kong and managed by specific institutions or permanent offices, including: (1) arbitral institutions established in Hong Kong or having their headquarters established in Hong Kong, and with their principal place of management located in Hong Kong; (2) dispute resolution institutions or permanent offices set up in Hong Kong by international intergovernmental organizations of which the PRC is a member; or (3) dispute resolution institutions or permanent offices set up in Hong Kong by other arbitral institutions and which satisfy the criteria prescribed by Hong Kong government (such as the number of arbitration cases and the amount in dispute, etc.). Hong Kong government should provide the list of the arbitration institutions and permanent offices to the PRC Supreme People’s Court and such list shall be mutually recognized by both parties.

    On March 31, 2023, the Hong Kong Department of Justice announced that the aforementioned arbitration institutions and permanent offices include:[1]

    • HKIAC;
    • Hong Kong Maritime Arbitration Group;
    • South China International Arbitration Center (HK);
    • eBRAM International Online Dispute Resolution Centre;
    • AALCO Hong Kong Regional Arbitration Centre;
    • China International Economic and Trade Arbitration Commission (CIETAC) Hong Kong Arbitration Center;
    • International Court of Arbitration of the International Chamber of Commerce – Asia Office.

    This list will be valid till April 1, 2025, and may be updated pending the application of arbitration institutions. Therefore, in arbitration cases administered by these institutions, with Hong Kong being the seat of arbitration, parties can apply for asset preservation with People’s Courts under the Mutual Assistance Arrangement before an arbitral award is rendered (including before applying for arbitration).

    It is worth noting that, according to the Mutual Assistance Arrangement, if the application is to be submitted after the arbitration case is accepted by the arbitration institution, such application should be submitted to the arbitration institution first, and then transmitted to the relevant People’s Court, which is similar to practice of mainland China domestic arbitration. Still, according to the judicial interpretations of PRC Supreme People’s Court regarding the Mutual Assistance Arrangement[2], the application may also be directly submitted by the applicant, together with a forwarding letter issued by the institution, to relevant People’s Courts.

    As for which People’s Court shall accept such application, the Mutual Assistance Arrangement stipulates that the applicant should apply to the Intermediate People’s Courts where the respondent is domiciled or where the assets are located. If these locations fall within the jurisdiction of different People’s Courts, the applicant should choose one of such People’s Courts to submit its application, instead of applying to multiple People’s Courts simultaneously.

    Additionally, according to the Provisions of the PRC Supreme People’s Court on Several Issues Concerning the Establishment of the International Commercial Court(《最高人民法院关于设立国际商事法庭若干问题的规定》)(the “CICC Provisions”), parties who elect arbitration institutions specified therein may apply to the International Commercial Court of the PRC Supreme People’s Court (the “CICC”) for asset preservations before or after applying for arbitration. Asset preservation orders rendered by the CICC may be executed by the lower-level People’s Courts designated by CICC. According to the Procedural Rules for the International Commercial Court of the PRC Supreme People’s Court (Trial)(《最高人民法院国际商事法庭程序规则(试行)》), parties seeking asset preservation for cases involving disputed amounts of more than RMB 300 million or other significant international commercial cases may submit their applications to CICC through the arbitration institution, in accordance with the PRC Civil Procedure Law and PRC Arbitration Law.

    According to notifications issued by the PRC Supreme People’s Court, two batches of arbitration institutions have been designated under the CICC Provisions, with HKIAC being the only non-mainland domiciled institution,[3] which, to some extent, has made HKIAC the most special international arbitration institutions to mainland China around the world. Therefore, most applicants should submit asset preservation application to relevant Intermediate People’s Courts, while for cases of significant amounts or under the jurisdiction of CICC, applicants can choose to submit preservation applications to the PRC Supreme People’s Court instead.

    2.2 Apply for Emergency Arbitrator Procedure under HKIAC Arbitration Rules

    Under Article 23.1 of the 2024 HKIAC Administered Arbitration Rules (the “HKIAC Arbitration Rules”), parties to arbitration may apply for urgent interim or conservatory relief prior to the constitution of the arbitral tribunal pursuant to Schedule 4 thereof. Schedule 4 of the HKIAC Arbitration Rules provides for the Emergency Arbitrator Procedure.

    Due to the lengthy process of constituting an arbitral tribunal in international arbitration, parties face risks such as asset transfers and evidence destruction before the formation of the tribunal. The Emergency Arbitrator Procedure emerged to address the need for urgent interim or preservation measures before the constitution of the tribunal, which provides a temporary relief mechanism before formation of the tribunal. After two to three decades of development, this mechanism has become an important part of the international arbitration.

    Under the HKIAC Arbitration Rules, interim measures that can be applied for under the Emergency Arbitrator Procedure include but are not limited to:

    (a) maintain or restore the status quo pending determination of the dispute; or

    (b) take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself; or

    (c) provide a means of preserving assets out of which a subsequent award may be satisfied; or

    (d) preserve evidence that may be relevant and material to the resolution of the dispute.

    Accordingly, interim measures under the HKIAC Arbitration Rules serve a similar function to asset preservation methods in mainland China.

    According to Schedule 4, a party requiring interim measures may submit an application for the appointment of an Emergency Arbitrator to HKIAC before, concurrent with, or following the filing of a Notice of Arbitration, but prior to the constitution of the arbitral tribunal. Thus, the Emergency Arbitrator Procedure offers an alternative path for parties seeking pre-arbitration preservation.

    3. Practicability of the Two Approaches

    Although both approaches in the regulatory framework appear to provide sufficient mechanisms for pre-arbitration asset preservation, empirical evidence indicates that there is a significant gap between the rules and their practical application.

    3.1 People’s Courts’ Unclear Stance to Embrace Pre-Arbitration Asset Preservation under Mutual Assistance Arrangement

    As previously mentioned, the Mutual Assistance Arrangement clearly stipulates that applicants can apply for asset preservation “before the arbitral award is rendered”. This description inherently includes two stages: the pre-arbitration stage and the during-arbitration stage. In the context of the judicial system in mainland China, these correspond to pre-arbitration preservation and during-arbitration preservation, respectively.

    The same conclusion can be reached through the analysis of language of the Mutual Assistance Arrangement. The arrangement differentiates between pre-arbitration and during-arbitration scenarios. For example, Article 3 of the Mutual Assistance Arrangement states that “if a preservation application is submitted before the arbitration case is accepted by the relevant arbitration institution or its permanent office, and if the People’s Court does not receive letter of acceptance from the relevant institution or its permanent office within thirty days of implementing asset preservation measures, the People’s Court shall lift the preservation measures accordingly”. Article 4, which describes the application materials required, indicates that “if the preservation application is submitted after the arbitration case is accepted by the arbitration institution, the applicant should submit the arbitration application documents containing the main arbitration requests, the supporting facts and reasons, and the letter of acceptance by the relevant institution or its permanent office”.

    However, in practice, People’s Courts are typically less receptive to grant an asset preservation order before the formal acceptance of an arbitration case. According to our recent experience, People’s Courts still require proofs that the arbitration case has been accepted by relevant arbitration institution when applying for asset preservation.

    It should be noted that according to the Mutual Assistance Arrangement, for asset preservation after the acceptance of the arbitration case, parties should apply to the arbitration institution for a “Letter of Acceptance” and submit it to the People’s Courts to prove the arbitration institution has accepted the arbitration case according to its rules. For HKIAC, such letter requires a separate application procedure, which cannot be submitted before the filing of the arbitration case itself. Thus, People’s Courts in fact still require applicants to apply for arbitration first and then apply for asset preservation with the People’s Courts, which means they do not accept pre-arbitration preservation applications.

    This contradiction can also be reflected by the statistical data. According to data published by HKIAC in October 2023, during the four years since the Mutual Assistance Arrangement took effect on October 1, 2019, all asset preservation applications made under the arrangement occurred after the acceptance of the arbitration cases, without exception.[4]

    As we can see, pre-arbitration asset preservation seems to be not feasible in practice. Based on our standing, one reason for this situation may be that People’s Courts consider that asset preservation measures, especially pre-arbitration asset preservation measures, could significantly impact the business operations of the respondent yet outcome of the case is uncertain. Therefore, People’s Courts tend to make decisions with great care to balance the applicants’ legitimate rights and the protection of respondents’ daily operations. Additionally, People’s Courts are typically more cautious in handling foreign-related and arbitration-related cases. Therefore, it may be difficult for People’s Courts to accept pre-arbitration asset preservation applications without seeing any documents from the arbitration institutions indicating that a claim has been filed. These reasons collectively result in the current tendency of People’s Courts not to accept pre-arbitration asset preservation applications.

    3.2 Difficulties in Obtaining and Enforcing Favorable Decisions in Emergency Arbitrator Procedure

    While the Emergency Arbitrator Procedure enhances the framework of international arbitration rules, it also presents opportunities for further improvement.

    First, Emergency Arbitrator Procedure does not encourage applicants to achieve asset preservation without opposite party’s knowledge.

    According to the HKIAC Arbitration Rules, necessary materials for applying for an Emergency Arbitrator Procedure include “confirmation that copies of the Application and any supporting materials …… have been or are being communicated simultaneously to all other parties to the arbitration ……”. Further, the Emergency Arbitrator’s decision involves multiple opportunities for the respondent to express its views before the decision is made. The HKIAC Arbitration Rules also stipulates that the Emergency Arbitrator must “ensure that each party has a reasonable opportunity to be heard on the Application”. Similar requirements are also shown in the arbitration rules of other renowned international arbitration institutions.

    Therefore, for respondents intending to transfer assets to avoid enforcement, this procedure might not effectively achieve the applicant’s goal, as the respondents may quickly transfer their assets upon receiving notice of the Emergency Arbitrator Procedure, which will lead to the failure of the applicant’s attempt.

    Second, although the threshold for initiating Emergency Arbitrator Procedure is quite accessible, it is subject to stringent substantive review standards, making it difficult for applicant to obtain a favorable decision.

    The applicant must demonstrate urgency of Emergency Arbitrator’s decision and its reasonable probability of success in terms of substantive rights and obligations of the arbitration case. This strict review standard is evident as shown in the statistical data released by international arbitration institutions. According to ICC, since the Emergency Arbitrator Procedure was adopted to its arbitration rules in 2012, Emergency Arbitrators have rejected 51% of all applications during the ten years until 2022. In 2023, of the 27 applications received, only 12 applications were approved, with 9 applications being partially approved.[5]

    Third, Emergency Arbitrator’s decisions are often difficult to be enforced by courts. Even if a party obtains a favorable Emergency Arbitrator’s decision, enforcing such decision will still be a significant challenge.

    Even if a party obtains favorable Emergency Arbitrator’s decisions, the ultimate question of how such decisions are to be enforced remains an inescapable issue.

    On the one hand, one of the fundamental principles of Emergency Arbitrator Procedure is that parties are supposed to voluntarily comply with the decisions of the Emergency Arbitrator. However, this very principle means that the legislators did not extensively consider the issue of enforcing such decisions. The silence on the enforcement of Emergency Arbitrator’s decisions also provides opportunities for malicious defendants to exploit.

    On the other hand, there is no consensus among countries regarding the enforcement of Emergency Arbitrator’s decisions. As of now, only countries/regions such as Austria, Singapore, New Zealand, and Hong Kong have explicit legal provisions for enforcing Emergency Arbitrator’s decisions. Some countries even explicitly reject the enforcement of such decisions.

    Generally speaking, foreign arbitration awards are recognized and enforced by courts under The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). However, due to the provisional nature of Emergency Arbitrator’s decisions and the fact that Emergency Arbitrators are typically appointed directly by arbitration institution, there remains uncertainty on critical issues as to whether Emergency Arbitrator’s decisions fall within the scope of the New York Convention’s arbitration awards, and whether Emergency Arbitrators fall within the scope of the New York Convention’s arbitrators.

    These issues are also reflected in the HKIAC Arbitration Rules. Articles 2.8 and 2.13 of the HKIAC Arbitration Rules specify that the term “arbitral tribunal” does not include Emergency Arbitrators, and the term “awards” does not include awards rendered by Emergency Arbitrators, showing HKIAC does not believe the Emergency Arbitrator, or the awards of Emergency Arbitrator, should be mixed with arbitrators or arbitral awards in regular procedures. This complicates the process for judicial authorities in recognizing and enforcing Emergency Arbitrator’s decisions. Thus, whether a domestic judicial authority will recognize and enforce Emergency Arbitrator’s decisions largely depends on the jurisdiction’s stance toward such decisions.

    In mainland China, there are currently no publicly available cases demonstrating precedent where People’s Courts have recognized and enforced Emergency Arbitrator’s decisions made by foreign arbitration institutions. Moreover, even if People’s Courts were to support the recognition and enforcement of Emergency Arbitrator’s decisions under the New York Convention, the length of procedure in recognition and enforcement runs contrary to the parties’ pursuit of swift preservation measures.

    Further, the Mutual Assistance Arrangement does not encompass provisions related to Emergency Arbitrator Procedure. Additionally, the New York Convention does not apply to matters between mainland China and Hong Kong; instead, the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the HKSAR (《最高人民法院关于内地与香港特别行政区相互执行仲裁裁决的安排》) shall apply. But such arrangement also does not specify the enforcement of Emergency Arbitrator’s decisions. Therefore, there is no legal basis for People’s Courts to enforce Emergency Arbitrator’s decisions rendered in Hong Kong.

    In conclusion, for decisions rendered by Emergency Arbitrators, applicants are confronted not only with the challenge of securing favorable decisions, but also with substantial impediments as to enforcement. Consequently, the efficacy of this procedure in practical application seems to be restricted.

    4. Our Observations and Recommendations

    Based on the analysis above, we tend to believe that within the current framework of Hong Kong seated arbitration, there is no practically feasible direct path for applicants to achieve asset preservation before the arbitration process commences. However, this does not simply imply that there are no viable strategies available for us.

    Compared with the Emergency Arbitrator Procedure, applying for asset preservation under the Mutual Assistance Arrangement presents a more pragmatic option. Given the obstacles in directly applying for pre-arbitration preservation, parties may apply for arbitration first and request the arbitration institution to issue the Letter of Acceptance simultaneously, in order to expedite the process for submitting asset preservation application to the People’s Courts, thereby minimizing the time available for the respondent with malicious intent to transfer its assets. HKIAC recognizes such simultaneous submission arrangement and has further indicates that it can issue the Letter of Acceptance within 24 hours upon receipt of required materials.[6] We also recommend that parties communicate with relevant People’s Courts in advance to avoid unnecessary delays in the processing of such courts. Subject to the length of this article, we would like to refrain from elaborating on other additional measures at this time. For international clients, we advise that engaging PRC counsels at the earliest opportunity is imperative. This engagement should facilitate the formulation of a strategy for the implementation of asset preservation measures tailored to the specifics of the case, alongside the exploration of alternative solutions.

    Voluntary compliance and good faith performance of arbitral awards should be fundamental principles honored by parties when choosing arbitration for dispute resolution. In most of instances, however, compulsory enforcement remains a measure of last resort by the parties involved. We respect and recognize the original intent and value behind the Mutual Assistance Arrangement and Emergency Arbitrator Procedure, but given the scenarios discussed in this article, we are of the view that there is a greater need and anticipation for the clearance of practical impediments associated with the pre-arbitration asset preservation. We are hopeful that People’s Courts will effectively tackle practical challenges, thereby providing more ease to parties seeking protections of their rights and interests through international arbitration.


    [1] https://www.doj.gov.hk/en/community_engagement/announcements/20230331_an1.html

    [2] The Notice of the Supreme People’s Court on Implementing the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the HKSAR (《最高人民法院关于贯彻执行<最高人民法院关于内地与香港特别行政区法院就仲裁程序相互协助保全的安排>的通知》)

    [3] The Notice of the General Office of the Supreme People’s Court on Identifying the First Batch of International Commercial Arbitration and Mediation Institutions Included in the ‘One-Stop’ Diversified Settlement Mechanism for International Commercial Disputes (《最高人民法院办公厅关于确定首批纳入“一站式”国际商事纠纷多元化解决机制的国际商事仲裁及调解机构的通知》) and the Notice of the General Office of the Supreme People’s Court on Identifying the Second Batch of International Commercial Arbitration Institutions Included in the ‘One-Stop’ Diversified Settlement Mechanism for International Commercial Disputes (《最高人民法院办公厅关于确定第二批纳入“一站式”国际商事纠纷多元化解决机制的国际商事仲裁机构的通知》)

    [4] https://www.hkiac.org/news/hkiac-receives-100th-application-under-prc-hk-interim-measures-arrangement#

    [5] https://iccwbo.org/news-publications/news/icc-dispute-resolution-statistics-2023/

    [6] https://www.hkiac.org/arbitration/IMA-FAQs

    “Fork in the Road” (“FITR”) clauses, included in significant investment treaties, “provide that the investor must choose between the litigation of its claims in the host State’s domestic courts or through international arbitration and that the choice, once made, is final”.[1]  Hence, the fork in the road clauses result in that the investor has a choice of forum that is irrevocable.[2]

    For a long time, Fork in the Roadclauses have remained dormant within international investment law (“IIL”). It was not until 2009 that the sole arbitrator, Jan Paulsson, in Pantechniki v. Albania for the very first time, declined his jurisdiction on the basis of the FITR clause contained in the Albania-Greece BIT.[3] When it came to the application of the FITR clause, Mr. Jan Paulsson invested his emphasis on the normative sources of the claims concerned and the question of whether the claim brought before the investor-state arbitral tribunal has an “autonomous existence” from the claim submitted to the other court or arbitral tribunal instead of merely focusing on whether the dispute brought before the investor-state arbitral tribunal and the dispute submitted to another court or tribunal are the same. However, such an approach did not gain widespread acceptance, as many other tribunals continued to adhere to a rigid and formalistic interpretation regarding the application of FITR clauses.

    In this article, three recent Chinese cases in relation to the application of the FITR clause will be examined. Based on these examination, we will then subsequently discuss why the emphasis regarding the FITR clause should be shifted from formalism to substantialism.

    The Origin and Objectives of FITR Clauses

    The increasing number of bilateral investment treaties (“BITs”), multilateral investment agreements and other international conventions provide the cross-border investors with ample instruments to seek remedies in cases where their rights and investments have been infringed by host states. However, when observed from the perspective of host states, the landscape of investor-State dispute settlement (“ISDS”) undergoes a significant transformation. Host states have increasingly found their measures and policies subject to the scrutiny of international tribunals, and the local courts’ jurisdiction over certain investment disputes arising out of foreign direct investment are frequently exercised by these international tribunals.

    The ever-lasting struggle between the investors’ demands for international remedy and the host states’ insistence on sovereignty eventually gave birth to the FITR clause which can be found in most investment treaties nowadays. Within the envisagement of the drafters, this clause, as a compromised solution, is anticipated to serve, at least, two main purposes: to harmonize the different interests surrounding the ISDS; and to address the concerns of re-litigation or parallel proceeding and the potentially ensuing conflicting outcomes. However, as the following three cases would reveal, the FITR clause has significantly deviated from its intended purposes due to the rigid and formalistic approach adopted by international tribunals.

    Three Chinese Cases Pertaining to the Application of the FITR Clause

    On 26 March 2021, a three-member tribunal issued an award in Zhongshan Fucheng v. The Federal Republic of Nigeria. In this award, the arbitral tribunal rejected the jurisdictional objection raised by Nigeria on the basis of the FITR clause. Subsequently, on 10 January 2022, another tribunal, in the case of Wang Jiazhu v. Republic of Finland, ruled against Finland’s jurisdictional objection on the grounds that the FITR clause is inapplicable in the current case. One year later, on 16 February 2023, in the case of Asiaphos Limited and Norwest Chemicals v. People’s Republic of China, the tribunal came with a majority award in favour of China and this award, once again, touched upon the issue of FITR-based jurisdictional objection.

    Despite the varying merit issues addressed in the aforementioned three Chinese-related Investment-Treaty cases, the tribunal in each case faced a shared procedural issue, namely, FITR-based jurisdictional objection. Ultimately, all three tribunals arrived at a consistent determination regarding the effect of the FITR clause. In light of this, the tribunals’ findings concerning the application and effect of the FITR clause deserve close attention.

    Zhongshan Fucheng v. The Federal Republic of Nigeria[4]

    In this case, the dispute concerns the unilateral termination by the Nigerian Ogun State of the joint venture agreement (“JVA”) signed with Zhongfu, a subsidiary of the Chinese company Zhongshan Fucheng (“Zhongshan”). The Claimant alleged that Nigeria had thereby breached its obligations under the China-Nigeria BIT (2001)[5] and commenced the arbitration. During the arbitral proceeding, Nigeria invoked the FITR clause on the basis that Zhongfu had previously opted to initiate legal proceedings in the state court against Ogun State. As a result, this invocation triggered the application of the FITR clause and thereby prohibited Zhongshan from pursuing the international arbitration proceeding.

    In detail, the tribunal primarily relied on the “triple identity tests”,which requires tribunal to determine whether claim is the same from parties, course of action, and relief sought, in reaching its decision. First, the parties are different as neither of the parties, Zhongshan and Nigeria in this arbitration, is party to the court proceedings where Zhongshan’s subsidiary Zhongfu and Nigerian Ogun State are involved. Secondly, the course of action is different as the court proceedings are based on the alleged breaches of JVA and domestic law while this arbitration is based squarely on China-Nigeria BIT (2001). Thirdly, the relief sought is different as in the court proceedings Zhongfu seeks declaratory and injunctive relief, whereas in this arbitration, Zhongshan seeks compensation.

    Based on the tribunal’s reasoning, concerns may arise that under the well-established and widely accepted “triple identity tests”, investors could potentially gain a significant advantage or even end up being invincible when confronted with the FITR-based jurisdictional objections raised by host states. One could reasonably imagine that initiating legal proceedings against the host state in its own courts, based on the provisions of the BIT can be challenging or practically impossible.

    Wang Jiazhu v. Republic of Finland [6]

    This arbitration was brought by the Claimant against the Republic of Finland and concerned the latter’s alleged extensive raid of Claimant’s investment center, the subsequent detention of Claimant and the effective appropriation of Claimant’s investments in Kouvala Finland.

    It is noteworthy, prior to the commencement of the arbitration, Claimant has originally chosen to submit the dispute at hand to the competent courts of Finland. Starting from 13 June 2013, the Claimant’s domestic legal proceedings went through the District Court, then the Court of Appeal and finally reached to the Finish Supreme Court. In this regard, Finland raised the FITR-based jurisdictional objections, arguing that under Article 9 of the China-Finland BIT (2004)[7], a typical FITR Clause, the Claimant no longer have recourse to international arbitration.

    In the Ruling on Respondent’s Jurisdictional Objection issued by the Tribunal on 10 June 2022, the Tribunal concluded that the Republic’s Jurisdictional Objection failed and therefore proceeded to a consideration of the merits claims raised by the Claimant. Among this 12 pages ruling, one key finding raised by the Tribunal is that the significant factual basis relied upon by the Claimant during the arbitration is his denial of justice claim. To be more specific, Claimant alleged that throughout the ruling and adjudication of Claimant’s Tort Claims heard in the Finland domestic courts, the courts had failed to give sufficient reasoning or neglected to address key issues. Such actions committed by the domestic courts fell within the scope of issues concerning fair and equitable treatment to investor during investmentand further gave rise to the Claimant’s denial of justice claim.

    Though Claimant had also initiated other claims such as protection and security, protection against expropriation which were likely to be overlapped with the claims raised in domestic courts, the very nature of the denial of justice claim eventually enabled the Claimant to circumvent the application of FITR clause. Because at the time when the Tort Claims were heard, the alleged denial of justice committed by the domestic court had not yet occurred. This case was settled on 24 October 2023, but an interesting hypothetical question worth considering. If the Tribunal later determines the denial of justice claim should be dismissed after considering the merits, would they revisit the jurisdictional aspects of the dispute and invoke the FITR clause? This issue appears to be insurmountable in practical application. Since it is commonly recognized that tribunal, especially international tribunal constituted based on treaty, has the power of competence-competence to determine its own jurisdiction, it has wide discretion to decide whether to deal jurisdiction issue in merits or not. Once the objection to FITR jurisdiction is adjudicated concurrently with the merits, the host state will largely be compelled to become involved in the substantive defense of the case.

    Asiaphos Limited and Norwest Chemicals v. People’s Republic of China[8]

    If the Zhongshan case stands for a prevailing view on how to interpret the FITR clause in international investment law, the Asiaphos case serves as a unique example, from the host state’s perspective, providing guidance to investors on how to circumvent one.

    The dispute of this case relates to the shutdown, sealing and mandatory “exit” of investors’ mines and associated mineral rights as China adopted a new policy which prohibited mining in and around the nature reserve. The Claimants initiated this arbitration primarily alleging the state’s new policy has expropriated investors’ investment which led to the violation of the Singapore-China BIT (1985)[9]. The core issue pertains to the determination of the scope of the state’s arbitral consent on the basis of article 13 (3) of the BIT “if a dispute involving the amount of compensation resulting from expropriation [……], it may be submitted to an international tribunal established by both parties”. The FITR clause, in this case, plays a significant role in the interpretation of the terms “dispute involving the amount of compensation resulting from expropriation”.

    To establish the Tribunal’s jurisdiction to hear the dispute not only the compensation resulting from the expropriation but also the existence and lawfulness of the expropriation, Claimants advocated that these two issues were inseparable and if Claimants are required to first file a claim in the court proceedings regarding the existence of an expropriation, then it would be precluded from seeking recourse to international arbitration regarding the compensation because of the FITR clause. Contrary to the Claimants’ position, the host state argued that the FITR clause would not be triggered if the domestic litigation is appropriately filed. The Tribunal eventually adopted the state’s position and elaborated that the investors could limit their request for relief before the national court to the question of legality of the measure in dispute and defer the question of appropriate amount of compensation to the subsequent arbitral proceedings. Then there would be no risk of triggering the FITR clause and giving rise to contradicting decisions as the two proceedings deal with different issues.

    Inspired by the Tribunal’s above reasoning, the investors in other cases may utilize the tactic of “claim-splitting”, which is dividing a single cause of action or claim into multiple ones and pursuing each one separately in different legal proceedings, to easily avoid triggering the FITR clause and then having a second bite at the cherry. In the end, the tribunal may find the award’s initial purpose of avoiding parallel proceedings and the ensuing contradictory decisions is satisfied at the cost of rendering the finality of the results of dispute settlement moot.

    Concluding thought: shifting the Emphasis from Formalism to Substantialism

    Overall, the aforementioned three cases primarily adhere to the “triple indentity test” method to determine whether the FITR provisions should be triggered. However, Before deciding whether such test should be applied to interpret FITR clauses or not, the very fundamental issue to solve is determining which rules to be applied. Since FITR clauses are treaty texts, Vienna Convention on the Law of Treaties (“VCLT”) is of certain to govern, of which Art. 31 referring that object purpose are to be considered when interpreting treaty texts gives a guideline to follow. In this regard, any test adopted by the tribunal should not deviate from the requirements regulated by VCLT. It is not difficult, however, to determine the actual role played by FITR clauses. As illustrated at the beginning of this article and has been observed by the ICSID tribunal in H&H v. Egypt, the purpose of a FITR provision is “to ensure that the same dispute is not litigated before different fora.”[10] i.e., to avoid parallel proceedings, where Claimant would enjoy second opportunity to present their cases. Thus, conclusion can be drawn that FITR clauses are drafted to prevent various detrimental effects of parallel proceedings and balance unequal position between host state and investor.

    Based on the foregoing analysis, the formalistic approach exemplified by the triple identity test exhibits significant deficiencies, rendering the application of the FITR clause virtually impossible. It is self-evident that investor-state arbitration is initiated based on treaty (namely treaty claim), while picture is far different in domestic litigation or arbitration, where majority of them are initiated solely and squarely based on domestic law or contracts (namely contract claim). If triple identity test is to be strictly followed, a foreseeable result is that FITR clause would enter a dormant state, which is also in violation of the interpretive principle of effectiveness.[11]

    Let’s revisit interpretation method provided in VCLT, since ordinary meaning of FITR clauses in many BITs are neutral, triple identity test is then applied as a supplementary tool to assist the tribunal determining the application of FITR clauses. However, This method of interpretation appears to have produced a contrary effect in practice, resulting in investor easily evading application of FITR clauses and having a second bite of the apple to present their case in different forums. Such interpretation is evidently contrary to the object and purpose of the FITR clauses.

    Standing in the current era of expanded ISDS and ample remedies available for investors, it is therefore of significant importance to shift the emphasis from a rigid formalistic identity test to a substantial overall assessment of the parties involved, the legal grounds invoked, the objects pursued and underlying facts or a measures/injuries oriented approach. With this transformation, a tribunal is required to dig deeper to find out whether the measure, adopted by the host state, which gives rise to the investors’ claim or the injury that formed the foundation of the claim, is the same in both proceedings.

    For example, if an investor pursues a case in domestic court proceedings seeking restitution in integrum for alleged expropriation by the host state based on contractual obligations, but subsequently seeks compensation in international proceedings relying on a BIT, the tribunal is expected to conduct a comprehensive and fact-intensive analysis to determine whether in both cases, the measures claimed or the injuries suffered by the investor are identical, i.e., both lead to host state’s commitment of expropriation. If the determination is affirmative, it is much likely that the FITR clause would be triggered.

    Undoubtedly, the real case presented before the tribunal would be much more complicated. However, it is only when the emphasis regarding the FITR clause is shifted from formalism to substantialism that the two main purposes surrounding this clause can be truly satisfied.


    [1] Dolzer, R. and Schreuer, C., Principles of International Investment Law, Oxford University Press, 2nded., 2012, p. 267.

    [2] Billiet, J.,International Investment Arbitration: A Practical Handbook, 2016, pp. 187-188.

    [3] Pantechniki S.A. Contractors & Engineers (Greece) v. The Republic of Albania, Award, ICSID Case No. ARB/07/21

    [4] Zhongshan Fucheng v. The Federal Republic of Nigeria, Award, Case 1:22-cv-00170.

    [5] China-Nigeria BIT (2001)

    available at: https://www.italaw.com/sites/default/files/laws/italaw170107.pdf

    [6] Wang Jiazhu v. Republic of Finland, Ruling on Respondent’s Jurisdictional Objection.

    [7] China-Finland BIT (2004), available at China – Finland BIT (2004) | International Investment Agreements Navigator | UNCTAD Investment Policy Hub

    [8] AsiaPhos Limited and Norwest Chemicals Pte Ltd v. People’s Republic of China, Award, ICSID Case No. ADM/21/1.

    [9] Singapore-China BIT (1985), available at China – Singapore BIT (1985) | International Investment Agreements Navigator | UNCTAD Investment Policy Hub

    [10] H&H Enters. Invs., Inc. v. Arab Republic of Egypt, Award, ICSID Case No. ARB/09/15.

    [11] For a discussion of the meaning and scope of the principle of effectiveness, see Richard K. Gardiner, Treaty Interpretation, pp. 66-68 (2d ed. 2015).

    The new PRC Company Law, which comes into effect on July 1, 2024, has drawn significant attention, particularly regarding the adoption of a series of new rules for registered capital contribution made by shareholders. However, detailed answers for some practical questions are not addressed in the new PRC Company Law. In order to effectively implement the new rules, the State Council issued the Provisions on the Implementation of the Registered Capital Registration and Management System under the Company Law (“Provisions”), which are implemented concurrently with the new Company Law on July 1, 2024.

    The Provisions specifically address how the new registered capital contribution system (“New System”) applies to companies newly established under the new Company Law (“New Companies”) and companies already established before its implementation (“Existing Companies”).  

    Below is a summary of the New Company Law and the Provisions with respect to the System for these two categories of the companies.

    Ⅰ. New Companies

      Shareholders of all New Companies must fully complete the registered capital contributions within 5 years from their establishment date.

      Ⅱ. Existing Companies

      1. Transition Period

      The Provisions provide for a uniform transition period of 3 years, from July 1, 2024 to June 30, 2027. During this period, the Existing Companies whose registered capital has not been fully paid up may need to adjust their registered capital.

      2. Adjustments

      • If its remaining contribution period, as stipulated in its original charter documents, is less than 5 years following July 1, 2027, the Existing Company is not required to make any adjustment. If its remaining contribution period, as stipulated in its original charter documents, is more than 5 years following July 1, 2027, the Existing Company must make adjustments to ensure that the revised contribution period will conclude no later than by June 30, 2032.
      • If the contribution period or the registered capital amount stipulated in the charter document of any Existing Company contravenes the principles of authenticity and rationality, local registration authority (“AMR”) is authorized to intervene, at its sole discretion, by initiating an independent assessment, and then order the Existing Company to revise its charter document to shorten the contribution period or to reduce the registered capital. The key determinants guiding the AMR’s decision include business scope, operation conditions, shareholders’ contribution capability, actual businesses, and asset scale, etc.

      3. Risks

      If any Existing Company fails to adjust its contribution period and/or registered capital as stipulated, AMR will, among the other things, make a special notation on the file of such company and publish it on the Credit Publicity System. It would adversely affect the company’s social credibility, and result in obstacles for the company when financing, participating biddings or applying for any administrative approvals.

      Ⅲ. Publication

        The Provisions and the new Company Law further specify that New Companies and Existing Companies shall disclose information related to their registered capital on the Publicity System within 20 working days from the date of its formation or change. This information includes, (i) subscribed and paid-in capital; (ii) method of contribution; (iii) contribution period; (iv) date of contribution; (v) changes in shareholding. This kind of information had not been mandated for disclosure under the previous Company Law. According to the new laws, failure to publish may lead to a fine of up to CNY 200,000. Additionally, the responsible executives and other directly responsible personnel may also encounter a fine of up to CNY 100,000.

        In light of the aforementioned new regulations, it is advisable to conduct a further verification and confirmation of the payment status regarding the registered capital of subsidiaries in China. Please ensure that any necessary adjustments are made in a timely manner during the designated transition period.

        *            *           *

        This publication has been prepared for clients and professional associates of AnJie Broad Law Firm.

        While every effort has been made to ensure accuracy, this publication is not an exhaustive treatment of the area of law discussed and AnJie Broad Law Firm accepts no responsibility for any loss occasioned to any person acting or refraining from action as a result of the material in this publication. Please seek the services of a competent professional advisor if advice concerning individual problems or other expert assistance is required.

        On July 1, 2024, the highly anticipated amended PRC Company Law (the “New Company Law”) has officially taken effect. The New Company Law ushers in some significant transformations in the way firms are established and run in China, a change that extends to foreign firms investing in the country. In this article, we will delve into the key amendments made to the provisions governing limited liability companies, considering that the majority of foreign-invested companies in China adopt this particular form.

        Ⅰ. Changes to Capital Contribution System

        1. Time Limit for Capital Contribution

          The previous Company Law allows shareholders to have flexibility in determining the schedule for capital contributions in a company’s articles of association. In theory, shareholders are not required to fully pay the registered capital until the company’s business term ends, which could span several decades. However, the New Company Law introduces a significant change by imposing a 5-year time limit for capital contributions. Shareholders are now obligated to fully pay the registered capital within 5 years after the company is established. Additionally, the company is required to disclose the subscription and paid-up status of the registered capital through the registration information system, ensuring transparency to the public.

          2.Acceleration of Capital Contribution

          In accordance with the aforementioned provision, the articles of association of a company can allow a timeframe of up to 5 years for shareholders to fully pay up their registered capital. However, it is important to note that the New Company Law introduces a caveat to this arrangement. If the company fails to repay any of its debts as they become due, both the company itself and its creditors have the right to demand that shareholders expedite their capital contributions. This requirement applies even if the scheduled payment of registered capital has not yet become due as specified in the company’s articles of association.

          3. Other Responsibilities Related to Capital Contribution

          • According to the New Company Law, shareholders have not only the obligation to make their own capital contributions promptly, but they are also responsible for ensuring that other shareholders duly fulfill their contribution obligations as well. In cases where any shareholder fails to make the required contribution as specified in the articles of association, the other shareholders may be held jointly and severally liable.
          • Directors have a duty to verify the capital contributions made by each shareholder and are required to urge shareholders to rectify any instances where their contributions are not made in full or in a timely manner, as specified in the articles of association. Directors may be held personally liable if they fail to properly fulfill this obligation.
          • If a shareholder fails to make the contribution within the prescribed time frame and after urged by the directors, but still fails to pay within a grace period of no less than 60 days, the company’s board may forfeit such shareholder’s equity interests by issuing a forfeiture notice.

          Ⅱ. Changes to Provisions on Share Transfer

          1.Other Shareholders’ Consents Not Required by Law

            Under the previous Company Law, any share transfers require obtaining consents from more than half of the shareholders. However, the New Company Law has eliminated this requirement. According to the new law, non-transferring shareholders now only have the right of first refusal but no veto power over proposed transfers by other shareholders. Although the shareholders’ consents are not required for the share transfer by the new law anymore, shareholders are entitled to different mechanism and limitations over the share transfer so long as these are specified in the articles of association of the company.

            2. Effective Date of Share Transfer

            Under the new law, the shareholder register of a company carries greater importance, requiring it to record the dates when each shareholder becomes and ceases to be a shareholder. Additionally, the law specifies that a transferee of shares can exercise their shareholder rights once their name is officially entered into the shareholder register. As a result, the effective date of a share transfer is typically when the transferee’s name is recorded as the company’s shareholder in the register, which is also the date when the company issues the investment certificate to the transferee. There is no doubt that the provision in the previous law, which stipulates that amendments to the articles of association related to changes in shareholders and shareholdings do not necessitate shareholder resolutions, will gain enhanced enforceablility under the new law.

            3. Transfer of Shares with Corresponding Registered Capital Uncontributed

            Similar to the previous Company Law, the New Company Law allows for share transfers even if the registered capital corresponding to those shares has not been fully contributed. However, the New Company Law now specifies that the transferee must contribute the full amount for the transferred shares in a timely manner. If the transferee fails to fulfill this obligation, both the transferor and transferee will be jointly and severally liable.

            Ⅲ. Protection of Minor Shareholders

            1.Redemption by Company

              Under the new law, if the controlling shareholder abuses their shareholder rights and causes significant harm to the interests of the company or other shareholders, the other shareholders have the right to demand that the company redeem their shares at a reasonable price.

              2. Joint Liability of Controlling Shareholders

              According to the New Company Law, if controlling shareholders instruct any directors and senior management personnel to engage in actions that harm the interests of the company and other shareholders, these shareholders will be held jointly liable along with those directors and senior management personnel.

              Ⅳ. Corporate Governance

              1. Relaxing Corporate Governance Structure

                Under the New Company Law, for small-sized companies or companies with few shareholders, it is now possible for the company to operate without the position of a supervisor, as long as all shareholders unanimously agree. This means that in such cases, a shareholder can appoint a single individual to be both the director and the general manager of the company concurrently. This provision acknowledges the flexibility required for small-sized companies and reduces the administrative burden on them.

                For medium-sized companies or companies with many shareholders, it is not mandatory to have the position of a supervisor. Instead, these companies can choose to establish an audit committee within the board of directors which will fulfill the role similar to that of supervisors or board of supervisors. This committee will be responsible for overseeing financial reporting, internal controls, and other related matters, ensuring transparency and accountability within the company.

                2. Employee Representative at Board

                It is mandated in the new law that if a company employs over 300 individuals, it must have an employee representative as one of its directors. This representative is required to be elected through a democratic method.

                3. Compensation for Departing Director

                Under the provisions of the New Company Law, directors are granted the right to request compensation if they are removed from their position by the shareholder(s) without justifiable reasons. This provision aims to safeguard directors from arbitrary or unfair removals and encourages responsible decision-making by shareholders.

                4. Disqualification from Decisions on Connected Transactions

                Under the New Company Law, if a director, supervisor, senior management personnel, or any relatives or affiliates of the aforementioned individuals enter into transactions with the company, they are required to report it to the board or shareholder’s meeting. These transactions can be direct or indirect.

                When it comes to voting on resolutions related to these transactions, the directors involved in the transaction are disqualified from participating in the vote. This is to ensure impartiality and avoid conflicts of interest.

                Additionally, if the number of unrelated directors present at a board meeting is less than three, the matter should be submitted for review and approval by the shareholder’s meeting. This requirement ensures that decisions regarding related transactions receive appropriate scrutiny and oversight.

                Please contact the author listed below if you request additional information or have any questions regarding the issues raised in this article

                *            *           *

                This publication has been prepared for clients and professional associates of AnJie Broad Law Firm.

                While every effort has been made to ensure accuracy, this publication is not an exhaustive treatment of the area of law discussed and AnJie Broad Law Firm accepts no responsibility for any loss occasioned to any person acting or refraining from action as a result of the material in this publication. Please seek the services of a competent professional advisor if advice concerning individual problems or other expert assistance is required.

                A Brief Analysis on the List of Typical Application Scenarios of Artificial Intelligence for Drug Governance

                1. Introduction and Background

                  On June 18, 2024, the National Medical Products Administration of People’s Republic of China issued the List of Typical Application Scenarios of Artificial Intelligence for Drug Governance (the “List”), presenting fifteen application scenarios that can play a leading demonstration role, possess characteristic of development potential, address pain points during the work, and tailor to more urgent needs. 

                  It is noted from the beginning of the List that, the following guiding regulations adopted previously are playing a fundamental role in framing the List:

                  No.Guiding OpinionsIssuing Governmental AuthorityIssuance Date
                  1The 14th Five-year Plan for National Economic and Social Development of the People’s Republic of China and the Outline of the long-range goals for 2035The National People’s CongressMarch 12, 2021
                  2Development Plan on the New Generation of Artificial IntelligenceThe State CouncilJuly 8, 2017
                  3Guiding Opinions on Enhancing Scene Innovation and Promoting High-quality Economic Development with High-level Application of Artificial IntelligenceMinistry of Science and Technology, Ministry of Education, Ministry of Industry and Information Technology, Ministry of Transport, Ministry of Agriculture and Rural Affairs, National Health CommissionJuly 29, 2022
                  4Drug Governance Network Security and Information Construction “14th Five-Year Plan”National Medical Products AdministrationApril 24, 2022

                  It is widely and notably recognized that application scenarios are pivotal when considering artificial intelligence (“AI”) empowering and supporting a variety of industrial sectors.  According to the above-listed guided opinions and plans, issuance of a list describing various application scenarios have been underscored as a standardized approach, aiming to integrate AI into traditional industrial fields such as drug research, production and operation. 

                  The Circular Regarding the Issuance of the List (the “Circular”), promulgated by the General Affairs Department of the National Medical Products Administration also sets the goal of the List as follows:

                  • promoting the research and exploration of AI-backed technology in the field of drug governance,
                  • enhancing the deep integration of AI and drug governance as the main line,
                  • standardizing and guiding drug regulatory authorities at all levels to carry out research and application of AI technology,
                  • guiding the focus of resources and promote the AI-enabled drug monitoring system, and
                  • providing reference and guidance for related research and application of other scientific research institutions, technology companies and pharmaceutical enterprises.

                  2. Specific Guidance on AI-powered Application Scenarios

                  In order to thoroughly address the current issues regarding AI-backed drug and medical device, the detailed application scenarios have been initially divided into four major categories, which further encompass several specific scenarios in each group.  The below table shows headlines of those major categories along with scenarios elaborated in each type. 

                  No.CategoryApplication Scenarios
                   1Admittance and ApprovalProcedural review
                  Auxiliary review and evaluation
                  Batch arrangement and processing
                   2Routine SupervisionRemote supervision
                  Onsite supervision
                  Auxiliary sampling for examination
                  Auxiliary inspection and case handling
                  Drug alert
                  Network transaction governance
                   3Public ServiceService processing and policy consulting
                  Elderly-oriented modification on instruction
                   4Auxiliary Decision-makingService data query
                  Data analysis and forecast
                  Work scheme inspection
                  Risk management

                  Pursuant to the List, the category regarding admittance and approval is related to threshold of entering the circle, which is likely to draw much of market players’ attention.  In this regard, however, the List provides that we, people use AI technology to build a large language model (the “LLM”) based on relevant laws and regulations, in order to (i) realize the automatic intelligent review of the electronic application materials for the registration of drugs and medical devices, (ii) expediently determine the compliance of application materials, and (iii) analyze and compare the research data of the declared products, which in turn determine the authenticity of data in question at a preliminary phase, and then provide the specific basis regarding non-compliance.[1]  With more AI embraced in the preliminary review and screening of application material, it merits further attention that pertinent applicants shall draft and submit the material in accordance with the instructions provided by the National Medical Products Administration so as to pass the AI review and screening model smoothly.  Though the List, namely, is mainly focusing on drug governance, procedural review on medical device and cosmetics are also covered in this part, which could enhance efficiency and productivity in the relevant process.[2]

                  What’s more, worthy of mention is the emphasis of AI-powered LLMs in the List.[3]  It is well-noted that the LLM has emerged as a bright spot for today’s AI advancements.  The list actively responds to this development trend by directly referring to the application of LLM for several times, encouraging people to harness the LLM capacity in aspects of information searching and analyzing, generating initial draft of certain types of documents, data processing and forecast, and even the auxiliary review work, aiming to improve the working quality and efficiency, thereby boosting the high-quality development. 

                  Last but not the least, the List makes clear the auxiliary aiding function of AI-related technology served in pertinent work, indicating roles and continuous efforts of staff involved like inspectors on such matter.  For instance, with respect to onsite supervision and sampling for examination, certain work will still be primarily conducted by inspectors or reviewers.[4]  This is not hard to believe since those work may require substantial discretion to occasionally decide on an ad hoc basis whether a particular activity should be penalized or excused under the routine scrutiny and surveillance.  Similarly, during the decision-making process, AI’s aiding role is determined while individuals involved are highly encouraged to harness its strong computing capacity and data process abilities, even generating the initial draft of certain analysis and inspection reports.[5] 

                  3. Guiding List and Open-ended Approach

                  AI-powered technology has become increasingly important in the development of pharmaceutical industry.  For instance, AI-backed drug discovery has experienced boom in recent years.  Meanwhile, it goes without saying that the pharmaceutical industry holds significant importance in terms of public well-being, people’s health conditions and human’s lifespan.  In order to fully take advantage of the cutting-edge technology, maximizing its benefits brought to key industrial sectors, the guiding opinions, regulations or list in question can catalyze the process, facilitating the actual application in particular scenarios. 

                  Admittedly, the network security and data security also merit emphasis.  The Circular underlines that all related units shall pay attention to issues associated with the network security and data security.  According to the category and classification-based protection requirements of data resources subject to governance rules and the computing capacity requirements required by the AI model, appropriate application deployment schemes shall be selected.  In the meantime, system and data access rights shall be reasonably set to avoid the risk of data leakage and abuse, so as to ensure the safe and steady application and development of AI technology concerning drug governance, which has been fairly elaborated in existing laws and regulations like Network Security Law, Data Security Law and Personal Information Protection Law. 

                  In addition, it is worth noting that the List, pioneered by the Chinese pharmaceutical authority, is the first guiding regulation on the national level that navigates the AI application scenarios in a vertical industry.  Prior to issuance of the List, some governmental authorities in local level have delved into the discussion regarding application scenarios of AI or similar digital technology, granting some pilot projects in this regard.[6]  Those local-level attempts mainly focus on the implementation while the List is crafted to offer higher-level guidance covering the pharmaceutical industry.   

                  Due to its attribution, relevant policy makers have strived to employ an approach combining a typical specific list with a comparatively broad guideline.  Certainly, market players involved shall comply with the existing legal framework in respect of network and data security as a whole.  But the List concentrates on offering instructions empowering AI-backed technology in various subdivision of drug governance, leading to increasing application in practice.  Undoubtedly, the List develops a sensible legal and policy response to the actual application of AI by listing possible scenarios.  The implementation of the List along with realization of the aspirations implied in the Circular are well worth expecting and hope to open more opportunities in a variety of industrial sectors. 


                  [1] See Application Scenarios No. 1 of the List.

                  [2] See supra note 1.

                  [3] See Application Scenarios No. 1, 2, 7, 9, 10, 11, 12, 13 and 14 of the List.

                  [4] See Application Scenarios No. 5 and No. 6 of the List.

                  [5] See Application Scenarios No. 9 and No. 13 of the List.

                  [6] According to the First Batch and the Second Batch of Key Construction Projects on Artificial Intelligence Application Scenarios in Hangzhou, issued by Hangzhou Municipal Bureau of Economy and Informatization on April 25, 2021 and June 29, 2021, respectively, specific projects were listed to facilitate the AI application scenarios in certain type of industries, such as fintech, smart healthcare, smart education, and so forth.