A Note providing an overview of the legal framework governing AI ethics in China. The Note examines the role of governmental and non-governmental organisations, addresses key ethical issues such as privacy, transparency, bias, and accountability, and discusses China’s participation in global AI governance initiatives. It covers professional responsibility in AI development, AI-induced negligence, and challenges in the legal framework. The Note also suggests future directions for AI ethics in China, including the potential development of a comprehensive AI law and national standards.

By the mid-2010s, China (PRC) emerged as a global leader in AI research and development (R&D), with local tech companies investing heavily. Since 2023, China has witnessed an explosion in AI R&D, fuelled by significant investments from industry giants such as Alibaba, Baidu, ByteDance, and Tencent.

This growth is driven by significant government support, massive data pools, widespread adoption, and relatively high quantities of research papers and patents. These advancements occur amidst increasing global technological competition.

As AI becomes more integrated into daily life, concerns about privacy, security, employment, and social stability lead the Chinese government, academic institutions, and tech companies to consider ethical frameworks that guide AI development and use.

This Note provides an overview of the legal framework governing AI ethics in China, examines the role of governmental and non-governmental organisations, addresses key ethical issues such as privacy, transparency, bias, and accountability, and discusses China’s participation in global AI governance initiatives. It covers professional responsibility in AI development, AI-induced negligence, and challenges in the legal framework. The Note also suggests future directions for AI ethics in China, including the potential development of a comprehensive AI law and national standards.

Emergence of AI Ethics as a Concern

In the 2010s, as AI technologies became more integrated into daily life, concerns about their ethical implications emerged. The Chinese government, academic institutions, and tech companies recognised the need for frameworks to guide ethical AI development and use, addressing issues of privacy, security, employment, and social stability.

During this period, high-profile incidents involving the misuse of facial recognition technology, data privacy concerns, and targeted advertising abuse highlighted the potential risks of unchecked AI development.

The overall environment in China during the late 2010s likely contributed to widespread concerns about ethics in science and technology.

In July 2019, the government established the National Science and Technology Ethics Committee (国家科技伦理委员会) (National Ethics Committee) to promote the development of a more comprehensive, ordered and co-ordinated governance system for science and technology.

The National Ethics Committee set up a subcommittee for AI, formally incorporating AI into the national science and technology ethics regulatory system (see AI Subcommittee of the National Ethics Committee).

Measures for the Review of Science and Technology Ethics (Trial)

AI science and technology are developing faster than laws and regulations.

Against this background, the Ministry of Science and Technology (MOST) promulgated the Measures for the Review of Scientific and Technological Ethics (Trial) 2023 (2023 Ethics Measures) to ensure that entities fully assess the ethical implications of their AI scientific R&D activities, among other things.

Ethical Review Requirements

Under the 2023 Ethics Measures, entities conducting AI R&D in sensitive ethical areas must set up an ethics review committee (Article 4).

The measures propose that ethics review committees should adhere to the following guidelines:

  • Composition and appointment. Committees must consist of at least seven members appointed for terms of up to five years, with the possibility of re-appointment (Article 7).
  • Expertise requirements. Members should include peer experts with relevant scientific and technical backgrounds, as well as those in ethics, law, and other related fields (Article 7).
  • Diversity and inclusion. Committees should include members of different genders and individuals from outside the unit. It is essential to include members familiar with local conditions for ethnic autonomous areas. (Article 7.)
  • Integrity and co-operation. Members should have a good track record of integrity and co-operate with other tasks arranged by the committee (Article 8).

AI R&D should undergo an ethics risk assessment before initiation.

Ethics review committees should review AI R&D activities within the scope of the 2023 Ethics Measures. The scope includes:

  • Scientific and technological activities that do not directly involve humans or experimental animals but may pose ethical risks and challenges. For example, in areas such as life and health, the ecological environment, public order, and sustainable development.
  • Other scientific and technological activities that require ethics reviews in accordance with laws, regulations, and relevant national provisions.

(Articles 2 and 9.)

Expert Re-Evaluation

Certain AI R&D activities are subject to expert re-evaluation, which is a type of government ethics review. Activities include:

  • Research on synthesising new species that significantly impact human life and values, the ecological environment, and so on.
  • Research related to introducing human stem cells into animal embryos or foetuses, and their subsequent development into individuals in animal utero.
  • Fundamental research involving alterations to the genetic material or genetic patterns of human germ cells, fertilised eggs, and pre-implantation embryos.
  • Clinical research on invasive brain-computer interfaces for treating neurological and mental health disorders.
  • Developing human-machine fusion systems that strongly impact human subjective behaviour, psychological emotions, and overall well-being.
  • Developing algorithm models, applications, and systems that have the ability to mobilise public opinion, shape social awareness, or influence behaviour.
  • Developing highly autonomous decision-making systems for scenarios involving human safety and health risks.

(Article 25 and Appendix, 2023 Ethics Measures.)

Conducting an Ethics Review

An ethics review committee must check:

  • Whether the proposed AI R&D complies with scientific and technological ethics principles. The participating personnel, research infrastructure, and facility conditions must also meet relevant requirements.
  • Whether the AI R&D may generate new or useful information, have scientific or social value, improve human welfare, or realise sustainable social development. There should also be a reasonable risk-to-benefit ratio. Risk control and incident response plans should be scientific, appropriate and viable.
  • Whether AI R&D recruitment schemes involving human research participants are fair and reasonable, and personal privacy data, biometric and other sensitive information is processed following personal information (PI) protection laws. Informed consent processes must also be compliant and appropriate.
  • That reviews for scientific and technological activities involving data and algorithms:
    • cover data collection, storage, processing, and use activities;
    • cover the R&D of new data technologies;
    • comply with relevant national regulations on data security and PI protection; and
    • have reasonable data security risk monitoring, emergency response plans, ethical risk assessments, and user rights protection measures, as appropriate.
  • That conflict-of-interest statements and management plans are reasonable.

(Article 15, 2023 Ethics Measures.)

Ethical Compliance

Under the 2023 Ethics Measures, entities must:

  • Establish an ethics review committee.
  • Provide necessary staff, office space, and funding for performing ethics reviews.
  • Take measures to ensure that ethics review committees can independently conduct ethical review work.

(Article 4.)

Ethics review committees must:

  • Abide by China’s constitution, laws and regulations, and ethical norms of science and technology.
  • Develop and improve management systems and work standards.
  • Provide ethics consultations and guide personnel in conducting ethics risk assessments.
  • Conduct ethical reviews and track and supervise the entire process of AI R&D.
  • Determine whether AI R&D falls within the scope of key scrutiny.
  • Organise training for committee members and personnel.
  • Accept and assist in investigating complaints and reports.
  • Register, report, and co-operate with relevant departments for regulatory work.

(Articles 5 and 8.)

To ensure compliance with the 2023 Ethics Measures, entities should create and implement several internal policies, procedures, and guidelines.

Entities have a clear legal obligation to consider ethical issues. However, the legal framework for ethics in AI can be considered vague and fragmented.

This could result in:

  • Ethics committees facing difficulties when making decisions.
  • Different ethics committees and regulators reaching inconsistent conclusions on ethical issues.

National Policies Addressing AI Ethics

This section covers the key policies, opinions, and guidelines governing the AI ethical landscape in China.

Due to significant overlaps, some principles within the mentioned documents are not addressed. However, novel or interesting concepts are discussed.

2017 AI Plan

The release of the Next Generation Artificial Intelligence Development Plan 2017 (2017 AI Plan) by the State Council was a seminal moment for AI in China.

The 2017 AI Plan:

  • Sets ambitious goals for China to become the world leader in AI by 2030.
  • States the need for ethical standards in AI development and calls for integrating ethical considerations into AI research, development, and deployment.
  • Emphasises the importance of formulating laws, regulations, and ethical norms to promote the development of AI.

It sets out specific requirements, including:

  • Strengthening research on legal, ethical, and social issues related to AI.
  • Establishing a legal and ethical framework to ensure the healthy development of AI.
  • Accelerating the research and formulation of relevant safety management regulations in areas such as autonomous driving and service robots.

The 2017 AI Plan calls for research on:

  • Legal issues related to civil and criminal liability confirmation.
  • Privacy and property protection.
  • Information security in AI applications.

It also emphasises the need to establish a system of accountability and clarity on legal subjects, rights, obligations, and responsibilities concerning AI.

Additionally, the 2017 AI Plan calls for:

  • Developing ethical norms and a code of conduct for AI R&D personnel.
  • Enhancing the assessment of potential AI benefits and risks.
  • Establishing solutions for emergencies in complex AI scenarios.

It advocates for active participation in global AI governance and research on major international AI issues (such as robot alienation and safety supervision). It also encourages international co-operation in AI laws, regulations, and international rules to collectively address global challenges.

2019 Beijing AI Principles

In 2019, a group of Chinese academic institutions led by the Beijing Academy of Artificial Intelligence released the Beijing AI Principles 2019 (2019 BJ Principles).

These principles provided one of the first comprehensive ethical frameworks for AI in China, addressing fairness, transparency, privacy, and security issues.

The 2019 BJ Principles were significant because they reflected a growing awareness within China’s AI community of aligning AI development with ethical norms.

2019 AI Principles

The Chinese government issued the Next Generation AI Governance Principle 2019 (2019 AI Principles) shortly after the 2019 BJ Principles.

The 2019 AI Principles aim to guide AI governance in China. They comprise eight main principles:

  • Harmony and friendliness.
  • Fairness and justice.
  • Inclusivity and sharing.
  • Respect for privacy.
  • Safety and controllability.
  • Shared responsibility.
  • Open collaboration.
  • Agile governance.

The 2019 AI Principles incorporate directives on respecting privacy, ensuring security, and promoting transparency and accountability in AI systems. These principles also emphasise the importance of international co-operation in AI ethics.

2020 Education Opinions

To implement the 2017 AI Plan, several government departments issued the Several Opinions on the Construction of Double First-Class Universities to Promote the Integration of Disciplines and Accelerate the Cultivation of Postgraduates in the Field of AI 2020 (2020 Education Opinions).

This move represents a form of governmental intervention in the higher education system aimed at accelerating AI development.

The 2020 Education Opinions mandate:

  • Strengthening AI research ethics education (Chapter 2, Article 3).
  • Promoting relevant international standards and ethical norms (Chapter 4, Article 11).
  • Cultivating talent prepared for global AI governance (Chapter 4, Article 11).

2021 AI Code of Ethics

The National Next Generation Artificial Intelligence Governance Expert Committee (国家新一代人工智能治理专业委员会) (AI Expert Committee), established under MOST in 2019, issued the Ethical Norms for Next Generation Artificial Intelligence 2021 (2021 AI Code of Ethics).

The code is non-binding but influential. It encourages entities to adopt ethical considerations throughout the entire AI life cycle, in order to:

  • Promote fairness, justice, harmony and safety.
  • Prevent issues such as prejudice, discrimination, and privacy and data leaks.

(Article 1.)

The 2021 AI Code of Ethics emphasises the following key principles:

  • Enhancing human well-being.
  • Promoting fairness and justice.
  • Protecting privacy and safety.
  • Ensuring controllability and reliability.
  • Enhancing accountability.
  • Improving ethical literacy.

(Article 3.)

The code also provides guidelines for management, R&D, supply, and usage practices.

Overall, it encourages the responsible development of AI technologies, stresses the need to protect individual rights, and promotes fairness. It is considered a step towards safely integrating AI into society.

2022 Judicial Opinions

China began using and testing AI within its judicial system in the late 2010s.

The Opinions of the Supreme People’s Court on Regulating and Strengthening the Judicial Application of AI 2022 (2022 Judicial Opinions) provide guidance for regulating and strengthening the application of AI in the judicial field.

It espouses the basic principles of:

  • Safety and legality. This principle contains an interesting concept to “promote harmony and friendship between man and machine.” This is uncommon in many ethical frameworks relating to AI, and though not explicitly stated, “friendship” could suggest the recognition of AI having some degree of personhood.
  • Fairness and justice. This requires ensuring that AI products and services are free from discrimination and prejudice. Technological interventions, including model or data deviations, should not compromise the fairness of trial processes and outcomes.
  • Auxiliary adjudication. The explanation of this principle clearly states that AI should be used to support judges, not replace them.
  • Transparency and trustworthiness. This requires that every aspect of AI systems is interpretable, testable, and verifiable.
  • Public order and good customs. This refers to integrating core socialist values (CSVs) into the entire process of judicial AI technology.

2022 CPC Opinions

On 20 March 2022, the General Office of the Communist Party of China Central Committee and the State Council jointly issued the Opinions on Strengthening the Governance of Science and Technology Ethics 2022 (2022 CPC Opinions).

The 2022 CPC Opinions outline the values and behavioural norms that scientific research, technological development, and other similar activities should follow.

Opinion 2 sets out the following ethical principles:

  • Improve human well-being.
  • Respect for the right to life. (While this principle does not prohibit animal experimentation, such practices must be reduced, replaced and optimised where possible.)
  • Adhere to fairness and justice.
  • Take reasonable control of risks.
  • Be open and transparent.

Opinion 4 elaborates further on ethical considerations:

  • Item 2 proposes the exploration of ethical certification measures.
  • Item 3 recommends strengthening ethics laws pertaining to AI and elevating crucial ethical norms to the status of law.

2023 Research Guidelines

In December 2023, the Department of Supervision of MOST issued the Guidelines on Code of Conduct for Responsible Research 2023 (2023 Research Guidelines). The guidelines set out scientific ethics and academic research norms that should generally be followed during scientific research.

While the 2023 Research Guidelines are not AI-focused, they provide that:

  • Generative AI (GenAI) may not be listed as a co-author (Section 4.7).
  • GenAI must not be directly used to generate scientific research project application materials (Section 1.1(2)).
  • Content marked as AI-generated by other authors should not generally be cited as original literature. Where it does need to be cited, an explanation should be provided. (Section 3.4).)
  • Peer reviewers should be careful when using AI during the review process (Section 5.3(6)). The consent of the review activity organiser should be obtained in advance (Section 6.1(7)).
  • Authors should disclose whether they use GenAI (Section 5.3(3)).

Standardised Guidelines for Ethical Governance of AI 2023

The Standardised Guidelines for Ethical Governance of AI 2023 was prepared to implement the 2022 CPC Opinions.

It derives the following ten ethical guidelines for AI from the principles stated in the 2022 CPC Opinions:

Ethic Principles in the 2022 CPC OpinionsEthical Guidelines for AI
Improving human well-beingHuman-oriented
Sustainability
Respect for the right to lifeCollaboration
Privacy
Adhere to fairness and justiceFairness
Sharing
Reasonable control of risksSecurity
Safety
Be open and transparentTransparency
Accountability

Legal Framework for AI Ethics in China

The Chinese legal framework governing AI ethics is contained in a patchwork of laws and regulations, including:

The Chinese government indicates that it is in the process of drafting a general AI law (see Legal Update, State Council Releases 2024 Legislative Plan). It is unclear when this law will be finalised.

2016 CSL

The 2016 CSL applies to:

  • The construction, operation, maintenance, and use of networks.
  • The supervision and administration of cybersecurity by network operators (who are defined as network owners, administrators, and network service providers).

Due to the nature of AI, businesses operating in the AI sector often fall within the definition of network operators.

The 2016 CSL requires network operators to:

  • Abide by laws and administrative regulations.
  • Show respect for social moralities.
  • Follow business ethics.
  • Act in good faith.
  • Perform the obligation of cybersecurity protection.
  • Accept supervision by the government and social public.
  • Undertake social responsibilities.

(Article 9.)

Some concepts within Article 9 can be the subject of dispute. For instance:

  • Business ethics are a recurring topic in unfair competition litigation.
  • Good faith can be an issue in contract disputes.

2021 DSL

The 2021 DSL applies to data handling activities carried out in China and the security of such activities (Article 2).

Given the broad definition of data, the 2021 DSL applies to virtually all business entities in China. Due to its comprehensive scope and the nature of AI, it seems that all businesses in the AI sector are subject to the 2021 DSL.

The 2021 DSL provides that during data handling activities, entities must (among other things):

  • Observe laws and administrative regulations.
  • Respect social public morals and ethics.
  • Follow commercial and professional ethics.
  • Uphold sincerity and trustworthiness.
  • Fulfil data security protection obligations.
  • Undertake social responsibilities.

(Article 8.)

While the requirements of the 2021 DSL are similar to those of the 2016 CSL, the ethical requirements in the 2021 DSL appear to be slightly wider in scope. However, the extent of this expansion remains unclear.

2021 PIPL

The 2021 PIPL applies to:

  • PI processing activities in China.
  • Certain PI processing activities targeting individuals in China.

While the 2021 PIPL does not explicitly mention ethics or morals, it incorporates several high-level principles that can be interpreted as ethical guidelines.

For instance, Article 5 provides that PI should be processed in accordance with the principles of lawfulness, legitimacy, necessity and good faith, and not in any manner that is misleading, fraudulent, or coercive.

Article 24 contains specific obligations applicable to AI ethics. It states that:

  • Where PI processors use automated decision-making to process PI, they must:
    • ensure transparency in the decision-making process;
    • ensure fairness and impartiality of the results; and
    • avoid implementing unreasonable differential treatment of individuals regarding transaction prices or other terms.
  • Where automated decision-making is used in business marketing or information push services, individuals must be provided with:
    • an option to opt out of targeting based on their personal characteristics; or
    • an easily accessible method to refuse such information.
  • If an automated decision significantly impacts an individual’s rights and interests, the individual has the right to:
    • request an explanation from the PI processor; and
    • refuse decisions made solely through automated processes.

Though not explicitly stated, Article 24 suggests the ethical principles of transparency, fairness, impartiality, non-discrimination, and autonomy when using AI to process PI.

2019 AUCL

The 2019 AUCL was enacted to promote the healthy development of the socialist market economy.

It aims to:

  • Encourage and protect fair competition.
  • Prevent acts of unfair competition.
  • Safeguard the legitimate rights and interests of business operators and consumers.

(Article 1.)

When carrying out production or business activities, a business operator must:

  • Follow the principles of voluntariness, equality, fairness, and good faith.
  • Abide by laws and observe business ethics.

(Article 2.)

In the context of AI training, the following actions are generally considered to violate the aforementioned principles:

  • Ignoring a website’s Robots.txt file or user agreements.
  • Overusing or misusing scraped data.
  • Disrupting or hindering the normal operation of legitimate online services or products.

In practice, the concept of business ethics became a point of discussion under the 2019 AUCL and its 2017 and 1993 predecessors in several litigations involving data and algorithms. Notably, several cases highlighted this concept, as illustrated below.

Yi Zhong Min Chu

In Yi Zhong Min Chu [2013] No. 2668, Company A accused Company B of violating the Robots protocol on Company A’s website by crawling and providing content from Company A’s website as search results to users.

One of the key disputes between the two parties was whether B’s non-compliance with the Robots protocol constituted a violation of business ethics.

Before this case, 12 search engine service companies in Beijing, through the China Internet Association, jointly established the Internet Search Engine Service Self-Discipline Convention 2012.

The convention explicitly stipulates the following provisions, which were adopted by the Beijing First Intermediate People’s Court:

  • Restrictions on search engine crawling should be based on industry-recognised reasonable justifications.
  • Robot protocols should not be used for unfair competition.

(Article 8.)

The court recognised this convention as an industry consensus among leading search engine companies, which are highly representative and dominate much of the market. This reflects the industry’s recognised business ethics and standards of behaviour.

However, the court also opined that the healthy development of the market requires an orderly market environment and fair market competition rules as safeguards.

The court further observed that Company B, in launching its search engine services, published the content and setting methods of the Robots protocol on its website. This action, the court reasoned, indicates that the entire internet industry, including Company B, recognises and complies with the Robots protocol.

Consequently, the court held that the Robots protocol should be recognised as:

  • A prevailing rule in the industry.
  • The business ethics that should be followed in the search engine industry.

Shanghai 73 Min Zhong

In Shanghai 73 Min Zhong [2016] No. 242, the court ruled against the defendant, a website operator, who had used a significant amount of information from the plaintiff’s platform without permission in a violation of recognised business ethics.

This unauthorised use substantially replaced the plaintiff’s products and services, causing harm to their interests.

The court further held that:

  • When assessing the business ethics of commercial transactions, it is essential to consider the interests of operators, consumers, and the public comprehensively.
  • Unfairness can be directed at actions that improperly infringe on consumer interests or harm public interests, as well as competitors, which may also be considered unfair.
  • In determining unfair competition in specific cases, judgments must be based on the standards of honesty and creditworthiness, considering the impact of the behaviours on competitors, consumers, and the public.

2021 Recommendation Algorithm Regulations

The 2021 Recommendation Algorithm Regulations were enacted to:

  • Regulate recommendation algorithm activities in internet-based information services.
  • Promote CSVs.
  • Safeguard national security and public interests.
  • Protect the legitimate rights and interests of citizens, legal persons, and other organisations.
  • Promote the sound and orderly development of internet-based information services.

(Article 1.)

Recommendation algorithm-based service providers should:

  • Abide by laws and regulations.
  • Respect social morality and ethics.
  • Observe commercial and professional ethics.
  • Follow the principles of being fair and equitable, open and transparent, scientific and reasonable, and act in good faith.
  • Conduct science and technology reviews.
  • Not set up algorithm models that:
    • promote user addiction;
    • encourage excessive consumption; or
    • violate laws, regulations, ethics, or morals.

(Articles 4, 7 and 8.)

2021 Science Law

In January 2022, the 2021 Science Law came into effect. It strengthens the ethical framework for science and technology, including AI, by enhancing ethics review, assessment, and supervision systems.

The 2021 Science Law contains the following key ethical provisions:

  • Science and technology personnel must adhere to academic norms and ethical codes, maintain professional integrity, and act in good faith. Fraud and support for superstition are strictly prohibited. (Article 67.)
  • China enhances intellectual property (IP) rights protection, ethics in science and technology, and security review mechanisms in international scientific research co-operation (Article 82).
  • China improves research integrity, supervision systems, and governance structures for science and technology ethics (Article 98).
  • A committee on science and technology ethics is established to enhance institutional norms, ethics education, and research. Entities involved in science and technology must take primary responsibility for conducting ethics reviews. (Article 103.)
  • R&D activities that harm national security, public interests or human health, or violate research integrity and ethical standards are prohibited. Serious violations must be recorded in a database of dishonest conduct. (Article 107.)
  • Anyone violating the 2021 Science Law, including its ethical guidelines, must make corrections. Authorities may withdraw funding and confiscate illegal gains. In serious cases, they may publicly disclose violations, impose penalties, and ban individuals from participating in funded or licensed activities for a period. (Article 112.)

2019 Network Content Provisions

The 2019 Network Content Provisions stipulate information content requirements in cyberspace based on CSVs.

Online content producers should avoid creating, reproducing, and disseminating:

  • Eleven types of illegal information.
  • Nine types of harmful information.

(Articles 6-7.)

2023 GenAI Measures

Under Article 4 of the 2023 GenAI Measures, the provision and use of GenAI services must adhere to all applicable laws, regulations, social morals, and ethical standards.

This includes compliance with the following requirements:

  • Adherence to CSVs, prohibiting the generation of content that:
    • incites subversion of state power;
    • overturns the socialist system;
    • harms national security and interests;
    • damages the national image;
    • incites separatism;
    • undermines national unity and social stability;
    • promotes terrorism, extremism, ethnic hatred, national discrimination, violence, or obscenity; and
    • spreads false or harmful information prohibited by laws and regulations.
  • Taking effective measures during algorithm design, training data selection, model generation and optimisation, and service provision to prevent discrimination based on nationality, beliefs, country of origin, region, gender, age, occupation, health, and other factors.
  • Respecting IP rights, business ethics, and preserving trade secrets.
  • Refraining from using advantages in algorithms, data, and platforms to engage in monopolistic and unfair competition practices.
  • Respecting the legitimate rights and interests of others, refraining from harming the physical and mental health of others, and avoiding violations of others’ rights to image, reputation, honour, privacy, and PI.
  • Implementing effective measures based on the service type characteristics to enhance the transparency of GenAI services and improve the accuracy and reliability of generated content.

Selected National Standards and Guidelines

China has a growing list of national standards that provide practical guidance on regulatory compliance issues and best practices concerning AI development, deployment, and use.

Some of these national standards provide guidance on ethical issues and include:

2021 AI Ethics Risk Prevention Guidelines

In January 2021, TC260 released the 2021 AI Ethics Risk Prevention Guidelines, providing guidance on:

  • The ethical use of AI.
  • The prevention of security risks associated with AI.

The guidelines require that an ethical safety risk analysis is done before AI-related activities are begun. The analysis must address five risk categories:

  • Uncontrollability risk. AI behaviour and impact exceed the predetermined, understood, and controllable scope.
  • Sociability risk. AI is unreasonably used, including abuse and misuse.
  • Infringement risk. AI infringes on basic human rights, including personal, privacy, and property rights.
  • Discrimination risk. AI influences fairness and justice with subjective or objective biases towards specific human groups.
  • Responsibility risk. Inappropriate behaviour of various parties related to AI, with unclear responsibilities.

2024 Basic GenAI Requirements

Appendix A to the 2024 Basic GenAI Requirements lists 31 safety risks. Under these requirements, the concept of safety should be construed broadly from the perspective of multiple stakeholders.

Appendix A is structured into the following sections:

  • A.1: Content in contravention of the CSVs.
  • A.2: Discriminatory content.
  • A.3: Commercial violations.
  • A.4: Infringement of the legitimate rights and interests of others.
  • A.5: Non-compliance with safety requirements of specific service types.

While many provisions in Appendix A could be characterised as ethical issues, the term ethics is only used in the phrase “violation of business ethics” (for more information, see 2019 AUCL).

2024 AI Framework

In September 2024, TC260 released the AI Safety Governance Framework 2024 (2024 AI Framework).

The framework outlines seven types of AI safety risks. This includes three ethical risks:

  • Exacerbation of social discrimination and widening of the intelligence divide. AI can collect and analyse human behaviours, social and economic status, and individual personalities. This data could be used to label and categorise groups of people and lead to:
    • systematic and structural social discrimination;
    • increased prejudice; and
    • widening intelligence divides among groups and regions.
  • Challenges to the traditional social order. AI development and application may significantly change production tools and relations. This could:
    • accelerate the reconstruction of traditional industry modes;
    • transform traditional views on employment, fertility, and education; and
    • challenge the stability of traditional social orders.
  • Becoming uncontrollable. The fast development of AI technologies means there is a risk of AI:
    • acquiring external resources;
    • self-replicating;
    • becoming self-aware;
    • seeking external power; and
    • attempting to seize control from humans.

To address these risks, the 2024 AI Framework proposes two response measures:

  • Filtering training data. Outputs should be verified during algorithm design, model training and optimisation, service provision, and other processes to prevent discrimination based on ethnicity, beliefs, nationality, region, gender, age, occupation, and health factors.
  • Ensuring AI safety. AI systems applied in key sectors (such as government departments, critical information infrastructure, and areas directly affecting public safety) should be equipped with highly efficient emergency management and control measures.

Role of Governmental and Non-Governmental Organisations

Chinese Association for Artificial Intelligence (CAAI)

The Chinese Association for Artificial Intelligence (CAAI), founded in 1981, is the only national-level academic association in intelligence science and technology officially authorised by China’s Ministry of Civil Affairs.

Article 3 of the CAAI Charter 2014 aims to promote AI science and technology development by adhering to China’s constitution, laws, regulations, state policies, social morals and customs.

The CAAI has an AI Ethics and Governance Working Committee.

Cyberspace Administration of China (CAC)

The Cyberspace Administration of China (CAC) is the central regulatory body overseeing internet policies, cybersecurity, PI protection, and data security in China.

The CAC plays a critical role in shaping China’s digital landscape, including its approach to AI. It has issued several regulations governing AI development, deployment, and use in China.

AI and algorithmic services related to public opinion or social mobilisation must be filed with the CAC (Article 17, 2023 GenAI Measures; Article 23, Provisions on Administration of Algorithmic Recommendation in the Internet Information Service 2021; Article 19, Administrative Provisions on Deep Synthesis in Internet-based Information Services 2022 (2022 Deep Synthesis Provisions, with effect from 10 January 2023)).

National Data Administration

In 2023, the National Data Administration was established to advance:

  • The planning and building of a digital China.
  • A digital economy.
  • A digital society.

Though its remit appears relevant to AI, it has yet to impact AI ethics.

Chinese Academy of Social Sciences (CASS)

The Chinese Academy of Social Sciences (CASS) is China’s premier academic organisation and comprehensive research centre for philosophy and social sciences.

It organises symposiums on AI and AI ethics, and its researchers regularly publish articles on AI.

AI Subcommittee of the National Ethics Committee

In July 2019, China established the National Ethics Committee and set up a subcommittee for AI.

According to the Party and State Institutional Reform Plan 2023, the role of the National Ethics Committee will transition from a co-ordinating body under the State Council to an academic and professional expert committee within MOST.

The AI subcommittee is responsible for:

  • Drafting guiding documents.
  • Organising academic seminars.
  • Facilitating in-depth discussions and exchanges among domestic and international experts and entrepreneurs.

On 2 February 2024, the AI subcommittee released the Ethical Guidelines for Brain-Computer Interface Research.

AI Expert Committee

In 2019, MOST established the AI Expert Committee to advance the development plan proposed in the 2017 AI Plan. The committee comprises experts and scholars from academic institutions, research units, and technology enterprises.

The AI Expert Committee released important guiding documents that expand upon China’s AI governance framework and action guidelines. These include:

AI Ethical Issues Under Chinese Law

Personal Freedom and Human Dignity

The Civil Code of the PRC 2020 (2020 Civil Code, with effect from 1 January 2021) protects natural persons’ personal freedom and human dignity (Article 109).

Many ethicists would refer to these as intrinsic rights. Many ethical and legal frameworks contain instrumental rights to support intrinsic rights.

Privacy and PI Protection

Privacy

Privacy can be regarded as an instrumental right that contributes to personal freedom and human dignity. This is because the act of monitoring an individual can impact how they exercise their personal freedom. The 2020 Civil Code recognises this phenomenon (Article 990(2)).

The 2020 Civil Code grants privacy rights (Articles 110 and 990). Article 1032 of the code provides:

“A natural person enjoys the right to privacy. No organisation or individual may infringe upon the other’s right to privacy by prying into, intruding upon, disclosing, or publicising another’s private matters.”

PI Protection

The 2021 PIPL contains generic provisions to protect the PI of individuals (and, by extension, their privacy). It also contains provisions concerning the processing of PI through automated decision-making (Article 24) (see 2021 PIPL).

GenAI

The 2023 GenAI Measures require that the provision and use of GenAI services must not infringe on personal privacy, as well as PI rights and interests (Article 4(4)).

Moreover, relevant agencies and personnel involved in the safety assessment and supervision of GenAI services must keep personal privacy and PI confidential (Article 19).

Transparency and Explainability

Transparency and explainability are concepts that appear in multiple legal sources and ethical frameworks for AI, including:

  • The 2023 Ethics Measures.
  • The 2024 Basic GenAI Requirements.
  • The 2023 Ethics Measures.
  • The 2019 BJ Principles.
  • The 2019 AI Principles.
  • The 2022 Judicial Opinions.
  • The 2021 PIPL.

They are perhaps most relevant where AI is employed to make decisions that have a material impact on an individual’s rights and interests.

Under the 2021 PIPL, individuals have the right to demand an explanation of how AI-driven decisions are reached (Article 24). However, the required level of detail for such explanations remains unclear.

GenAI services should be transparent under the 2023 GenAI Measures (Article 4(5)).

The 2024 Basic GenAI Requirements set out the following requirements for transparency:

  • Service providers should publicly disclose the target audience, scenarios, and purposes of the services on the homepage and other prominent locations. They should also disclose the usage of basic models.
  • Users should be provided with the following information in easily accessible locations (such as the homepage and service agreements):
    • service limitations;
    • brief information about the models, algorithms, and other relevant matters; and
    • the PI collected and its purpose concerning the service.
  • The above information should be disclosed in supporting documents where the GenAI service is provided through a programmable interface.

(Article 7(b).)

The People’s Bank of China also issued an industry standard that instructs financial institutions on how to disclose AI algorithm use to users (see Guidance on Information Disclosure for Financial Applications Based on AI Algorithms (JR/T 0287-2023)). The standard also provides examples of disclosures in its appendix.

Bias and Fairness

Under Chinese law, the terms bias and fairness have ambiguous meanings and are often treated similarly. Certain forms of bias and unfairness may be legally permissible, while others are not.

The law generally prohibits biased and unfair conduct in specific situations, particularly those involving deliberate or accidental actions related to protected characteristics.

Bias and unfairness may arise where a proxy value closely related to a protected characteristic affects the decisions of a decision-maker. For example:

  • Gender discrimination. Gender-based discrimination is often intertwined with factors predominantly associated with one gender, such as taking maternity leave. Consequently, penalising an individual for taking maternity leave may constitute gender discrimination.
  • Other forms of discrimination. Certain discriminatory practices may be less obvious. In China, some online platforms display different prices or offer varying discounts based on user characteristics and profiles. For example, a platform may show higher prices to Apple phone users than Android users. These characteristics could serve as proxy values for age, region, and so on.

The debate continues over whether these practices are legitimate business strategies, or unethical and potentially fraudulent behaviour.

Under the 2024 Basic GenAI Requirements and 2023 GenAI Measures, prohibited forms of bias and unfairness include:

  • Ethnic discrimination.
  • Discrimination based on beliefs.
  • Nationality-based discrimination.
  • Discrimination based on regional origin.
  • Gender discrimination.
  • Age discrimination.
  • Occupation-based discrimination.
  • Health-based discrimination.
  • Monopolistic behaviour or unfair competition.

Accountability

AI systems are tools created and provided by persons (natural and legal) that produce outputs at the behest of persons.

The many different individuals that might be involved in the creation, provision, and use of an AI system include:

  • Researchers.
  • Developers.
  • Ethics boards.
  • Regulators.
  • Vendors and suppliers.
  • Users.

It is widely recognised that AI system outputs can materially and negatively impact the rights and interests of an individual. Therefore, it seems appropriate to make at least one person accountable for the consequences of AI outputs. However, it can be difficult to say who should be accountable to individuals harmed by AI where numerous stakeholders are involved in creating, providing, and using an AI system.

Given the accountability problems associated with AI, the following rules assign obligations and liability to specific individuals:

  • A PI processor must explain automated decisions reached by processing PI to PI subjects whose rights and interests are significantly affected upon request. Individuals have the right to reject such decisions (Article 24, 2021 PIPL).
  • Service providers must ensure PI is processed in accordance with laws and regulations (Article 51, 2021 PIPL; Articles 7 and 11, 2023 GenAI Measures).
  • No person may use deep synthesis technology to infringe the rights of another person (Article 6, 2022 Deep Synthesis Provisions).
  • Certain AI service providers are responsible for the information security of their AI systems (Article 7, 2022 Deep Synthesis Provisions; Article 9, 2023 GenAI Measures).
  • Certain AI service providers are responsible for the outputs of the systems they provide (Articles 8-11, 2022 Deep Synthesis Provisions; Article 9, 2023 GenAI Measures).
  • Certain AI service providers must employ effective measures to protect minors from overreliance or addiction to AI (Article 10, 2023 GenAI Measures).
  • Business operators are prohibited from using AI to engage in monopolistic practices or abuse their dominant status (Articles 9 and 22, 2022 AML).
  • Road and demonstration test applicants should follow rules and be accountable for accidents involving smart, connected vehicles (Article 6, Administrative Rules on Intelligent and Connected Vehicle Road Testing and Demonstration Application (Trial) 2021).
  • AI medical device registrants should assume responsibility for the safety and effectiveness of medical devices throughout their development, production, operation, and use in accordance with the law (Article 13, Regulations on Supervision and Administration of Medical Devices 2021).

Censorship and AI

China operates an extensive censorship system that covers internet content, among other forms of media. China requires the censorship of both AI training data and AI outputs. Such training data and outputs are typically scraped from and provided online.

The 2019 Network Content Provisions stipulate that producers of online content are prohibited from creating, duplicating, or disseminating information that:

  • Contradicts the foundational principles outlined in China’s constitution.
  • Risks national security, reveals state secrets, attempts to subvert state authority, or disrupts national unity.
  • Harms the dignity or interests of the nation.
  • Distorts, defames, or dishonours the legacy and spirit of heroic martyrs, or disrespects the martyrs by insulting, defaming, or otherwise infringing upon their names, images, reputation, or honour.
  • Promotes terrorism or extremism or incites engagement in terrorist or extremist activities.
  • Instigates ethnic hatred or discrimination or threatens national solidarity.
  • Undermines the state’s religious policies or disseminates heresy and superstitious beliefs.
  • Disseminates false information or disrupts the economic and social order.
  • Spreads content that is obscene, pornographic, gambling-related, or violent, promotes murder and terror, or aids in criminal activities.
  • Insults or defames individuals, violating their reputation, privacy, or other legal rights and interests.
  • Includes any other content that is forbidden by laws and administrative regulations.

(Article 6.)

Online content producers must also avoid creating, reproducing, or spreading information that:

  • Employs sensationalist headlines that significantly misrepresent the content.
  • Sensationalises gossip, scandals, and misconduct.
  • Inappropriately comments on natural disasters, major accidents, and other catastrophes.
  • Contains sexual innuendo or provocation that could lead to sexual associations.
  • Displays graphic violence, horror, or cruelty that may cause distress.
  • Incites discrimination against groups or regions.
  • Promotes vulgar, obscene, or tasteless content.
  • May lead minors to imitate dangerous behaviours, violate social ethics, or develop poor habits.
  • Otherwise negatively impacts the health of the online environment.

(Article 7.)

Appendix A of the 2024 Basic GenAI Requirements lists several types of security risks. These risks can be considered derivatives of Articles 6 and 7 of the 2019 Network Content Provisions.

Responsibility and Negligence in AI

Professional Responsibility in AI Development

Individuals involved in AI development can be considered scientific and technological personnel.

The 2021 Science Law states that scientific and technological personnel should:

  • Be patriotic, innovative, truth-seeking, dedicated, and collaborative.
  • Ahere to the spirit of craftsmanship.
  • Observe academic and ethical norms in all kinds of scientific and technological activities.
  • Abide by professional ethics, and be honest and trustworthy.
  • Refrain from fraudulent practices in scientific and technological activities.
  • Avoid participating in or supporting superstition.

(Article 67.)

Legal Framework Governing Negligence

China has not yet established clear rules regarding liability for the actions of AI.

In SCLA v AI Company [2024] Guangzhou Internet Court (Yue 0192 Min Chu No.113), the court provided valuable guidance for determining the liability of AI and related service providers.

The court:

  • Held that the AI service provider failed to implement appropriate technical preventive measures. This allowed users to generate images containing elements of other copyright holders, which constituted IP infringement.
  • Assessed the need for compensation and found the AI service provider liable due to:
    • the absence of a complaint reporting mechanism;
    • a failure to alert users to potential risks; and
    • AI-generated images not being clearly identified.
  • Determined that the provider did not fulfill its duty of care and exhibited subjective fault.

Consequently, the AI service provider was ordered to pay RMB10,000 in compensation to the plaintiff.

For more information, see Practice Note, AI-Generated Content and Copyright (China): SCLA v AI Company.

AI in Other Professions: Law and Accounting

Law

Under the Law of the PRC on Lawyers 2017 (2017 Lawyers Law), the law firm employing a lawyer is liable for the lawyer’s wrongdoing where a party suffers losses. The law firm may seek recourse against the lawyer if the lawyer acted intentionally or with gross negligence (Article 54).

There are no exemptions or safe harbours covering the use of AI under the 2017 Lawyers Law. As such, lawyers should:

  • Ensure the quality of all work they produce.
  • Clearly explain any limitations or constraints on their work.
  • Provide disclaimers as appropriate.

Accounting

Under the Accounting Law of the PRC 2024 (2024 Accounting Law), the person in charge of an entity:

  • Is responsible for the authenticity and completeness of the accounting practice and the accounting documents of the entity (Article 4).
  • Should ensure the truthfulness and completeness of financial and accounting reports (Article 21).

There are no exemptions or safe harbours covering the use of AI under the 2024 Accounting Law.

Under the Specification for Accounting Informatisation 2024 (with effect from 1 January 2025), entities must stipulate the following in procurement contracts for accounting information services:

  • Service content.
  • Service quality.
  • Service duration.
  • Data security.
  • Other rights and responsibilities.

(Article 15.)

Entities conducting accounting informatisation involving AI should comply with relevant laws and regulations and respect social morals, ethics, and morality (Article 44).

Accounting software is regulated under the Specification for Basic Functions and Services of Accounting Software 2024 (with effect from 1 January 2025).

According to Article 42, where accounting software service providers are responsible for user accounting data being leaked or damaged, they must be responsible for restoration and compensation as stipulated.

However, the other liability of accounting software providers to users for AI-related issues is still unclear. As such, liabilities between parties will typically be determined by contract.

Preventative Measures and Best Practices

Methods for preventing or mitigating AI-induced negligence include:

  • Ensuring a qualified human is the ultimate decision-maker.
  • Providing qualified human decision-makers with adequate resources to manually fulfil their role.
  • Conducting a thorough risk assessment as a part of procurement activities.
  • Using well-drafted contracts to allocate liability and clearly define service standards.

Global Co-operation on AI Ethics

Global AI Governance Initiative

In October 2023, China proposed the Global AI Governance Initiative.

The initiative states that the development of AI should prioritise the well-being of humanity, ensure social security, respect human rights, and support sustainable development.

It also promotes:

  • The principles of fairness and non-discrimination in data acquisition, algorithm design, technology development, product development, and application.
  • An ethics-first approach, emphasising AI ethics guidelines, norms, and accountability mechanisms, supported by review systems.
  • The principles of broad participation, consensus, and incremental development.

Bletchley Declaration

On 1 November 2023, the Bletchley Declaration was published. China is a signatory of the declaration, along with 28 countries and the EU.

Ethical principles covered in the Bletchley Declaration include human rights, transparency, explainability, accountability, fairness, regulation, safety, human oversight, ethics, bias mitigation, privacy, and data protection.

The Bletchley Declaration emphasises focusing on risk identification and creating policies based on these identified risks.

For more information, see Practice Note, Key AI Regulatory Considerations in China: Bletchley Declaration.

Enhancing International Co-operation on AI Capacity-Building

On 1 July 2024, the United Nations General Assembly adopted a consensus resolution proposed by China and co-sponsored by over 140 countries (see UNGA: UNGA Adopts China-Proposed Resolution to Enhance International Cooperation on AI Capacity-Building).

Framework Convention on AI

The Council of Europe’s Framework Convention on Artificial Intelligence is an international treaty legally binding its signatories (see Council of Europe: The Framework Convention on Artificial Intelligence).

It is monitored through a Conference of the Parties to ensure signatories’ adherence. China is not a signatory. However, given that several major economies are signatories, it will likely have some indirect impact in China.

AI Ethics Challenges

Gaps in the Current Legal Framework

In China’s current legal framework, there are several unclear issues, including:

  • Unclear ethical obligations. Terms such as bias and discrimination are not clearly defined, which leads to uncertainty in their interpretation and application.
  • Absence of a GenAI Law. There is no overarching AI law in China. As a result, different regulators are responsible for regulating AI within their specific areas of competence.

This fragmented approach complicates compliance efforts, particularly for organisations with diverse interests across multiple sectors.

Balancing Innovation and Regulation

Regulators face the challenge of balancing innovation with regulation. An example of this can be found in the drafting process of the 2023 GenAI Measures.

The initial draft of the 2023 GenAI Measures, issued by the CAC, proposed that any entity or individual providing GenAI services should assume the responsibilities of the content producer. This caused significant controversy and raised concerns within the AI industry.

The explicit liability provisions were omitted from the finalised version of the 2023 GenAI Measures issued by the CAC and other regulators. This suggests that issues raised by one regulator may later attract the attention of other regulators and that regulators are trying to balance innovation and regulation.

Chinese laws and regulations are typically published for public consultation (Article 74, Legislation Law of the PRC 2023). This process provides stakeholders, including those in the AI industry, with an opportunity to voice their opinions on the governance of AI technology.

Future Directions

Many experts and scholars suggest that China should formulate a comprehensive AI law outside the existing legal framework for regulating AI.

To this end, two draft AI laws were released:

  • On 19 March 2024, experts from seven universities released the Artificial Intelligence Law (Scholar’s Draft) (人工智能法(学者建议稿).
  • On 16 April 2024, institutions including the Law Institute of the Chinese Academy of Social Sciences drafted and published the Artificial Intelligence Model Law 2.0 (Expert Draft).

Both drafts propose certain requirements for AI ethics. For example, Article 42 of the Expert Draft stipulates that:

  • An AI ethics review committee should be established for AI R&D activities that involve sensitive areas, as determined by the national AI authority.
  • AI ethics reviews should be conducted under relevant national regulations.
  • Other AI developers, providers, and users are encouraged to establish AI ethics review committees based on actual circumstances.

The State Council, in its Legislative Work Plan for 2023 and 2024, stated its intention to prepare to submit the draft AI law to the Standing Committee of the National People’s Congress for deliberation. For more information, see Legal Updates, State Council Releases 2024 Legislative Plan and State Council Releases 2023 Legislative Plan.

In terms of national standards, on 5 June 2024, the Ministry of Industry and Information Technology and other departments issued the Guidelines for the Construction of National AI Industry Comprehensive Standardisation System (2024 Edition).

The guidelines outline the following objectives:

  • By 2026, develop more than 50 new national and industry standards and improve the AI standard system covering seven key areas, including:
    • basic commonality;
    • key technologies; and
    • the safety and governance of AI products and services.
  • Standardise ethical governance requirements for the entire lifecycle of AI, including:
    • AI ethics risk assessments;
    • ethical governance technology requirements and evaluation methods for fairness and explainability of AI; and
    • AI ethics review standards.

Voluntary deregistration of a company in China is a rigorous process that involves multiple steps and requires adherence to detailed legal provisions. Beyond the statutes, understanding practical implementation nuances is crucial for navigating the procedure effectively. This guide provides a detailed overview of the legal framework, procedural steps, special provisions for foreign-invested enterprises (FIEs), challenges, and practical considerations associated with voluntary deregistration. By carefully navigating these steps and considerations, businesses can better position themselves to comply with regulations and address stakeholder concerns effectively.

1. Overview of Voluntary Deregistration

A company in China cannot simply cease operations; it must formally terminate its legal existence through the deregistration process. This involves the following key stages:

(a) Declaration of dissolution.
(b) Formation of a liquidation group.
(c) Asset liquidation and debt settlement.
(d) Submission of a liquidation report.
(e) Deregistration with the relevant authorities.

The primary goal of this process is to safeguard the interests of creditors, employees, shareholders, and other stakeholders while ensuring compliance with tax and regulatory obligations.

2. Procedural Step

Step 1: Resolution of Dissolution

The decision to dissolve must be approved by a resolution of the company’s shareholders. A two-thirds majority vote is required under the Company Law of the People’s Republic of China. Alternatively, all shareholders may sign a unanimous written resolution.

Once the resolution is passed, the company must publish the dissolution notice within ten days on the National Enterprise Credit Information Publicity System (“NECIPS”).

Step 2: Formation of the Liquidation Group

The board of directors is responsible for appointing a liquidation group within 15 days of the dissolution decision. The liquidation group shall consist of directors by default unless the company’s articles of association or a shareholder resolution specifies otherwise. The leader of the liquidation group shall be appointed by a resolution of the company’s shareholders from among the group members.

Failure to form a liquidation group may result in court intervention, with the court appointing an external liquidation administrator. The liquidation group must, within 10 days of its formation, announce the names of its members and leader via the NECIPS.

Step 3: Notification to Creditors and Debt Claim Submission

The liquidation group must notify known creditors within 10 days of its formation and publish a public announcement on NECIPS or in a newspaper within 60 days. The public notice must include the following details:

  • The notice period.
  • Contact person for debt claims.
  • Contact information.
  • Address for submitting claims.

Creditors must submit their claims within 30 days of receiving the notice or within 45 days from the public announcement date if they were not directly notified. Creditors’ claims should specify the nature of the debt and include supporting documentation. The liquidation group is responsible for maintaining a registry of all submitted claims.

No repayments to creditors are permitted during the debt claim submission period.

Step 4: Liquidation Activities

While accepting claims from creditors, the liquidation group will simultaneously undertake other critical activities related to the company’s liquidation. These responsibilities include the following key actions:

A. Asset Valuation and Inventory Compilation

  • Identify and appraise company assets.
  • Compile a comprehensive asset-liability statement and property inventory.
  • Apply to the court for bankruptcy proceedings if assets are insufficient to cover debts.

B. Liquidation Plan Development

  • Develop a detailed liquidation plan based on the asset and liability assessment.
  • Submit the plan for approval to the shareholders. If the liquidation group is court-appointed, the plan must instead be submitted to the court for approval.

C. Execution of the Approved Liquidation Plan

  • Resolve unfinished business activities.
  • Handle matters related to deregistration of branches, exit of external investments, and disposal of pledged equity.
  • Settle employee wages, social insurance contributions, and administrative fines.
  • Pay customs and tax dues, including any penalties and overdue amounts, and handle necessary tax documentation.
  • Clear outstanding debts and claims.
  • Liquidate/sell the remaining assets after settling the company’s debts.

During the liquidation period, the company remains in existence but must not engage in activities unrelated to the liquidation.

Step 5: Distribution of Remaining Assets

After settling liquidation expenses, employee wages, social insurance fees, statutory compensation, and outstanding taxes and debts, any remaining assets are distributed to shareholders based on their capital contributions. Shareholders cannot receive distributions of remaining assets until all debts are cleared as required by law.

Step 6: Final Liquidation Report and Confirmation

Upon completion of the liquidation process, the liquidation group must prepare a detailed liquidation report and submit it for confirmation to the shareholder or the court. The confirmation of the liquidation report requires the approval of shareholders representing at least two-thirds of the voting rights.

Step 7: Deregistration with Authorities

After completing the liquidation process, the liquidation group must apply for deregistration with the relevant authorities, addressing the following steps:

A. Tax Deregistration

The company must apply to the tax authorities for deregistration. During this process, the tax authorities will conduct a preliminary review to check for any outstanding matters. If unresolved issues are identified, the tax authorities will issue a Tax Matters Notification to the company, specifying the pending issues. The company must resolve all outstanding matters before proceeding with the tax deregistration. Once the review is complete and no issues remain, the tax authorities will issue a Tax Clearance Certificate.

B. Customs Deregistration (if applicable)

Companies involved in customs-related activities must apply for deregistration of their customs registration. Any outstanding taxes (including late fees), penalties, or other unresolved matters must be settled before the customs deregistration can be processed.

C. Business Deregistration with the Relevant Branch of Market Supervision and Administration Bureau

The liquidation group must apply to the relevant branch of the Market Supervision and Administration Bureau (the “company registration authority”) for deregistration within 30 days of completing the liquidation. The following documents must be submitted:

  • Application for deregistration.
  • Resolution or decision for deregistration.
  • Confirmed liquidation report.
  • Tax Clearance Certificate.

If the company has been issued a physical business license, both the original and duplicate copies must be returned to the company registration authority. After applying for deregistration, the company is prohibited from engaging in any production or business activities unrelated to the deregistration process.

D. Social Insurance Deregistration

The company must apply for social insurance deregistration within 30 days of completing its deregistration with the company registration authority. All outstanding social insurance fees, late fees, and penalties must be cleared before the deregistration is processed.

Step 8: Closure of Bank Accounts and Disposal of Seals

The company must close all bank accounts and render its official seals void. These actions mark the final step in terminating the company’s operational footprint.

3. Simplified Deregistration Procedures

A. Eligibility

Companies may qualify for simplified deregistration if:

  • No liquidation proceedings are necessary due to the absence of unresolved debts or financial obligations.
  • No outstanding liabilities exist, including debts, employee wages, social insurance fees, statutory compensation, or taxes (including late fees and penalties).
  • No unaddressed violations or compliance issues are pending.
  • Shareholders have provided or are willing to provide a written guarantee affirming the truthfulness of the above conditions, accepting joint liability for any false claims.

B. Preliminary Procedures

Before initiating a simplified deregistration process, a company must also first complete the deregistration of its branches and settle all outstanding tax and customs obligations. Additionally, the company may verify with the company registration and tax authorities its eligibility to waive the requirement for a tax clearance certificate. This waiver may apply if the company has not engaged in any taxable transactions or business operations since its establishment.

C. Application Process for Simplified Deregistration

The company must submit an “Application for Deregistration of Enterprises” duly signed by the legal representative and a written commitment signed by all shareholders to the company registration authority.

The commitment and deregistration application must be published on the NECIPS platform for a 20-day public notice period. During this time:

  • Creditors, stakeholders, or relevant authorities may raise objections.
  • Tax authorities will conduct a review and raise objections if there are unresolved tax or social insurance issues.

If no outstanding matters are identified, the application can proceed without delays. After the 20-day notice period, if no objections have been raised, the company may complete the deregistration process within the following 20 days. During and after the notice period, the company is prohibited from engaging in any activities unrelated to deregistration.

D. Post-Deregistration Steps
After completing the simplified deregistration process, the company must also complete social insurance deregistration and close all bank accounts and dispose of official seals.

4. Foreign-Invested Enterprises (FIEs): Special Provisions

FIEs face unique deregistration requirements beyond standard procedures. These include:

A. Approvals Related to Negative List or Licensing Requirements
FIEs involved in sectors listed under the Foreign Investment Negative List or requiring industry-specific licenses may need prior approval before deregistration.

B. Reporting with the Ministry of Commerce (MOFCOM)
FIEs are required to submit a deregistration report to the Ministry of Commerce (MOFCOM). However, submitting deregistration documentation to the company registration authority fulfills this requirement, as the latter forwards relevant data to MOFCOM, eliminating the need for separate submissions.

C. Deregistration with Foreign Exchange Administration

FIEs must deregister their basic foreign exchange information registration with designated foreign exchange banks before deregistration is complete. This step typically occurs after the liquidation announcement period and before the business license is canceled. Required documents include:

  • For standard deregistration: a copy of the liquidation announcement. For simplified deregistration: a printout of the no-objection notice from NECIPS with the company’s official seal.
  • A signed statement confirming that all corporate debts and liabilities have been fully settled and that no equity (or investment interests) is subject to freezing, pledges, or mortgages.
  • Tax Clearance Certificate, if applicable.

D. Outbound Fund Transfers

For liquidations involving outbound transfers of remaining assets, FIEs must complete tax clearance in compliance with relevant regulations. They are also required to submit a liquidation audit report, prepared by a certified accounting firm, to the designated foreign exchange bank handling the transfer. This report must detail any gains distributed to foreign shareholders. If the company plans to apply for tax treaty benefits, pre-approval may be necessary before obtaining tax clearance and completing the foreign exchange settlement.

E. Closure of Foreign Exchange Accounts

Foreign exchange accounts must be closed before invalidating the company’s official seals. Companies may choose to close these accounts either concurrently with outbound fund transfers or after the transfers have been completed.

5. Challenges and Practical Considerations

A. Preliminary Self-Audit

Before initiating the deregistration process, companies are strongly advised to perform a thorough self-audit. This process helps uncover and address potential issues that might impede or complicate deregistration. Key steps include:

  • Assessing Deregistration Feasibility: Evaluate the potential costs and challenges of deregistration. For example, companies with complex legacy issues, such as property disputes or unresolved debts, should carefully analyze the risks of proceeding.
  • Reviewing Historical Audits: Confirm whether all required audits for previous years have been completed. This will have implications on tax clearance and other regulatory processes.
  • Checking Regulatory Status: Ensure the company has not been listed as an irregular operation or abnormal entity due to non-compliance, such as failing to file annual reports.
  • Updating Registration Records: Ensure that all required registration updates, such as changes to legal representatives or directors, have been properly recorded with the relevant authorities. For instance, if the legal representative has changed but this update has not been officially registered, it could hinder the deregistration process with the company registration authority. This is because the deregistration forms must be signed by the legal representative currently recorded in the system, who may also be required to personally verify their identity during the process.
  • Resolving Tax Issues: Confirm that the company’s tax account is in good standing and not marked as “abnormal.” Address any missing filings or unresolved tax matters, ensuring that credentials such as accounts and passwords are accessible.
  • Evaluating Financial and Legal Obligations, and Anticipating Bankruptcy Risks: Assess assets, liabilities, and contracts, using the latest balance sheet as a baseline. Determine whether there is any likelihood of insolvency or bankruptcy based on the company’s financial condition.

The purpose of this audit is to identify and resolve potential challenges in advance, ensuring a smooth and efficient deregistration process. By proactively addressing matters such as employee terminations, intellectual property disputes, real estate issues, or the disposal of international investments, companies can develop effective strategies to mitigate risks and avoid delays. This thorough preparation not only streamlines the liquidation and deregistration process but also safeguards the company against unforeseen liabilities.

B. Ongoing Obligations Before Completing Liquidation

Companies must continue submitting annual reports to the company registration authority on time and maintain a fixed contact address. Failure to do so may result in the company being listed in the abnormal business directory by the company registration authority. Companies must also continue to maintain proper bookkeeping, conduct audits, and file tax returns on a regular basis.

6. Conclusion

Voluntary deregistration is a meticulous process requiring strict adherence to statutory requirements and practical foresight. The operational details may be subject to updates, and specific requirements can vary across different regions. Companies are advised to engage legal, tax, and accounting professionals to navigate the complexities and ensure compliance. Proper planning and execution not only mitigate risks but also preserve the rights and interests of all stakeholders involved.

On 10 December 2024, the State Administration for Market Regulation (“SAMR”) released the Guidelines for Review of Horizontal Concentration of Undertakings (“Guidelines”). It is the first time that China publishes guidelines to display the detailed analytical framework, review approach and key considerations in the merger review procedure. The Guidelines were based on years of review experience accumulated in China and also reflects the most updated global economic dynamics and features.

The Guidelines embody 87 articles in total distributed in 12 chapters, covering all the core aspects such as evidence materials, market definition, market share and concentration degree, unilateral and coordinative effects, potential competition, market entry, buyer power and efficiency.

This article extracts and highlights those contents that have most practical significance for the merger filing, with the view to updating multinationals with the latest development in China’s merger review regime.

I. Crucial Principles Underlined

The Guidelines lay out a few key principles in the opening chapter that SAMR will usually stick to in its merger review. Particularly, it is underlined that the competition concerns that SAMR cares about in the merger review are those incurred specifically due to the concentration. It implicates that competition issues existing already before the concentration are not focus of the antitrust review.

Furthermore, the counterfactual analytical approach is stressed as one instrument of the merger review toolkit. Specifically, SAMR could compare the hypothetical market competition situation ex post the concentration, either with the competition situation ex ante the concentration, or alternatively with the foreseeable or possible market competition situation ex post the concentration with the assumption of no concentration. Whether or not a significant lessening of market competition would happen in the end through the counterfactual analysis matters for SAMR to issue its decision.

II. Consideration of Evidence Materials

The Guidelines are particularly beneficial in terms of explaining from what channels SAMR could collect evidence and how much importance that different types of evidence materials may carry. Specifically, China’s merger review agency (“agency”) may obtain evidence materials from concentration parties (“parties”), upstream suppliers, downstream customers or end consumers, relevant government departments, industry associations, competitors, and etc. They may also engage experts, scholars, third-party consulting agencies, who have no conflict of interest in the reviewed concentration, to provide specific opinions.

The formality to obtain evidence materials include but not limited to requesting stakeholders to assist in the merge review investigation, soliciting opinions in writing, sending questionnaires, surveys, symposiums, argumentation meetings, commissioned consultations, on-site research, etc.

The evidence materials related to the merger review mainly include:

  • commercial documents and records prepared by the parties;
  • transaction documents with binding effects, such as memorandums of understanding and share purchase agreement;
  • documents explaining the transaction purpose or efficiency that may arise from the concentration;
  • information and materials on the market competition and future development trends, such as market analysis or research reports, forecasts, consumer survey reports made by the parties or independent third parties;
  • information on how the parties and other stakeholders view competitors, such as internal documents evaluating or describing competitors, regular reports on business performance, including but not limited to monthly sales reports and other documents that can explain their business performance;
  • materials reflecting preferences and behaviors of customers, such as bidding records, actual customer conversions between suppliers, and relevant customer survey reports;
  • strategic documents and financial information, such as research and development plans, investment proposals, commercial feasibility analysis, financial reports;
  • materials on pricing strategies of the parties, such as price lists, sales forecasts and analysis, discount or rebate policies, past price fluctuations, and their influencing factors.

The agency will comprehensively evaluate all relevant evidence materials to determine their authenticity, relevance and probative value. The role of each evidence material may vary depending on their types, sources, collection methods, as well as significance on competition analysis elements and competition issues arising from the concentration. In general, evidence materials formed by the parties during the business operation are more persuasive than documents and materials specially produced for the concentration. Compared to the views of upstream suppliers and the parties, the opinions of downstream customers on concentration are more important in the eyes of the agency. The agency usually will not evaluate the competitive effects solely based on the views of an individual competitor.

III．Analysis From Perspectives of Market Share and Market Concentration

One instructive breakthrough is that the Guidelines clarify SAMR’s general approach to evaluating horizontal merger from the perspective of market share, which is summarized below:

  • for combined market share exceeding 50% post-transaction, anticompetitive effects would usually be presumed by SAMR unless the parties could provide evidence to rebut this presumption (“presumption of anticompetitive effects”).
  • for combined market share ranging from 25% to 50%, SAMR tends to scrutinize the transaction closely (“close scrutiny”); in particular, where the combined market shares fall between 35% and 50%, SAMR tends to consider anticompetitive effects likely (“likely anticompetitive effects”).
  • where combined market share ranges from 15% to 25%, SAMR usually would not find anticompetitive effects (“likely no anticompetitive effects”).
  • where the combined market share is below 15%, SAMR could presume no anticompetitive effects after ensuring the reasonableness of market definition and accuracy of market share data (“presumption of no anticompetitive effects”).

Market concentration is another crucial factor that SAMR looks into when reviewing a transaction. CRn and HHI are two commonly used indicators that SAMR often looks into when evaluating the market concentration degree and its changes incurred by the concentration, with the latter one is employed in practice more often and widely. The agency generally divided the market into three types:

  • low concentration market: HHI below 1000;
  • moderately concentrated market: HHI ranges from 1000 to 1800;
  • highly concentrated market: HHI above 1800.

The agency typically uses the following criteria to examine potential effects of concentration on competition:

  • where the HHI post concentration is lower than 1000 or Δ HHI is lower than 100, the agency generally does not consider that the concentration has or may have anticompetitive effects;
  • where the HHI post concentration ranges from 1000 to 1800, and Δ HHI is higher than 100, the agency tends to believe that the concentration has or may have anticompetitive effects, thus a comprehensive review is necessary;
  • where the HHI post concentration is higher than 1800, and the Δ HHI is between 100 and 200, the agency is more inclined to believe that the concentration has or may have anticompetitive effects, thus a comprehensive review is necessary.
  • where the HHI index post concentration is higher than 1800 and the Δ HHI is higher than 200, the agency usually presumes that the concentration has or may have anticompetitive effects, unless the parties can prove otherwise.

IV．Unilateral and Coordinative Effects

Economic analysis tools are suggested when screening if unilateral effects may occur, such as quantitative analysis methods of the Upward Pricing Pressure (UPP), Gross Upward Pricing Pressure Index (GUPPI), and Merger Simulation.

For coordinative effects, if any of the following situations happens, the agency will tend to consider that the concentration is likely to produce coordination effects:

  • post concentration, the combined market share of the parties and another business operator in the relevant market reaches two-thirds, and each has a market share exceeding one tenth;
  • post concentration, the combined market share of the parties and two other business operators in the relevant market reaches three-quarters, and each has a market share exceeding one tenth;
  • the concentration will eliminate a business operator who may hinder market coordination or substantially eliminates that operator’s motivation to hinder market coordination.

V. Counteracting Factors

When anticompetitive effects are identified in the review of a concentration, SAMR usually will also look into whether any counteracting factors may exist, such as constraints from potential competition, easy market entry and buyer power. In practice, market entry can only effectively prevent or offset the potential adverse effects of a concentration on competition if the entry is possible, timely and sufficient.

The possibility of market entry refers to the chance that business operators can enter the relevant market and successfully impose competitive constraints on the concentrated entity after entry. When evaluating the possibility of market entry, factors such as market entry barriers, market operating conditions, and market development expectations should be considered.

The standard for determining the timeliness of market entry depends on the characteristics and dynamics of the market, as well as the specific production capacity of potential entrants. Normally, the agency believes it timely if market entry can be completed within two years.

The sufficiency of market entry means the ability of entrants to impose sufficient and effective competitive constraints on the concentrated entity. When conducting the evaluation, factors such as size, business scope and product substitutability will be considered overall. Usually, only when the entrant reaches a certain scale will it pose effective competitive constraints.

When determining whether market entry is possible, timely and sufficient, the agency can usually collect information and evidence materials from the following aspects:

  • past market entry and exit cases in relevant or similar markets;
  • plans for other competitors to enter the relevant market, and expansion plans of existing competitors; if there is any potential market entrant with necessary assets or motivations to enter the relevant market;
  • direct statistical data or information on market entry barriers, such as the financing scale, R&D investment and output needed for entering;
  • if scale economy is relevant, it is necessary to consider whether new entrants can reach sufficient scale in a timely manner to form effective competitive constraints, as well as the cost disadvantage when the minimum scale cannot be achieved;
  • the time required to recoup investment costs after entering the market;
  • the cost of exiting the market;
  • the impact of technological progress on market entry;
  • whether existing competitors in the market sign long-term contracts with downstream customers;
  • whether downstream customers have the ability and willingness to assist in entering new markets;
  • possible imported products or supply substitutes;
  • if the relevant regional market is the domestic market in China, the possibility of foreign suppliers entering the domestic market in China needs to be considered.

Having buyer power alone does not guarantee that anticompetitive influence can be effectively offset. When evaluating the buyer power, the agency usually focuses on the following three latitudes:

  • can business operators with buyer power exercise their buyer power to benefit other customers without buyer power as well;
  • when the business operator with buyer power is not the end consumer, can the benefits obtained through exercising buyer power be passed on to the end consumer;
  • do business operators with buyer power have sufficient motivation and willingness to exercise their buyer power.

The Guidelines also stress that the buyer power that existed before concentration may not necessarily continue after concentration, as concentration may lead to increased market control of the entity after concentration, or may eliminate important alternative suppliers. Therefore, the agency usually evaluates buyer power after concentration rather than before concentration.

VI. Failing Firm Defense and Government Subsidies

The failing firm theory is provided in the Guidelines for the first time, in line with the practice of key antitrust jurisdictions worldwide. When analyzing if the failing firm defense could be accepted, the agency will check whether the following three conditions are simultaneously met:

  • the business operator being acquired or merged is facing operational difficulties, and if not acquired or merged, it will exit the market in the short term;
  • there is no alternative solution that would cause less damages to competition than this concentration to prevent the aforementioned operators from exiting the market;
  • compared to the market exit, the potential anticompetitive effects that the concerned concentration may bring are weaker.

Responding to the EU FSR regulation, the Guidelines also touch upon the public subsidy in one provision generally. Specifically, if there is evidence to prove that domestic and foreign government subsidies obtained by the concentration parties may have adverse effects on competition in the relevant market, the agency may require the concentration parties to provide information on the government subsidies obtained and consider their adverse effects on fair competition.

VII. Conclusion

Notably, introduction of the Guidelines possesses appreciable practical significance for companies, which could enhance the review transparency, facilitate substantive self-assessment of businesses and improve predictability of the review decision. Companies that engage with complex and difficult deals are suggested to conduct a prior self-assessment based on the Guidelines. 

—— Judicial Practice and Evaluation of the Impact of the “Implementing Measures for the Administration of Company Registration” on Removal Registration Disputes

In order to implement the new requirements for company registration stipulated in the newly revised “Company Law” and the “Provisions of the State Council on Implementing the Registered Capital Registration System of the People’s Republic of China Company Law,” on December 20, 2024, the State Administration for Market Regulation published the “Implementing Measures for the Administration of Company Registration“, effective from February 10, 2025. In response to the execution difficulties concerning past effective judicial judgments involving company registration matters, the “Implementing Measures for the Administration of Company Registration” clearly states that companies are obligated to cooperate with changes for registered filing items such as shareholders, directors, supervisors, senior management, and legal representatives as specified in effective legal documents. The company registration authorities have the duty to assist in enforcement and make public announcements. The introduction of the “Implementing Measures for the Administration of Company Registration” provides practical and effective protection for individuals seeking removal from identity registrations like shareholders, directors, supervisors, senior management, and legal representatives, bridging the “last mile” gap in disputes over removal registration.

In this article, we will analyse the background and filing conditions for disputes over removal registration, focusing on the key points of court rulings in cases of legal representative removal registration lawsuits, and evaluate the impact of the “Implementing Measures for the Administration of Company Registration” on improving mechanisms for assisting in the execution of removal based on practical experience.

1. Background for Removal Registration Disputes

In recent years, disputes involving legal representatives requesting removal from registration have significantly increased. Some cases arise because the legal representative no longer wishes to continue serving; others involve nominal holders who do not wish to be named due to risk considerations or individuals who were registered as legal representatives without their knowledge. Since these individuals typically neither control the company and or possess necessary documents for changing company registration, they are unable to independently apply for a change in registration without the cooperation of shareholders and the company. Therefore, they would have no choice but to resort to judicial relief by filing a suit.

Prior to the Supreme People’s Court’s retrial ruling in case（2020）最高法民再88号[1], there was controversy within judicial practice regarding whether removal registration disputes met the conditions for court acceptance. The Supreme People’s Court pointed out in that case that if the people’s court does not accept the plaintiff’s lawsuit, the plaintiff would expose to a legal risk which continues to exist without any remedy, so the plaintiff’s suit for the change of legal representative registration can be accepted by the people’s court. Thereafter, removal registration disputes became an effective judicial remedy for directors, supervisors, senior management, and legal representatives to protect their rights.

2. Key Points of Rulings – Loss of Appointment Basis and Exhaustion of Internal Remedies

a. Whether the Basis for Holding Office Still Exists

When hearing cases of removal registration disputes, courts focus on whether the removal requester still a reasonable basis for has continuing to hold the relevant position. Therefore, it is necessary for the removal requester to clarify the basis for serving as a director, supervisor, senior management, or legal representative of the company and the legal relationship with the company, which has already terminated.

From the legislative purpose of the “Company Law“, directors, supervisors, senior management, or legal representatives should have substantial relevance to the company. Taking the relatively special role of legal representatives as an example, Article 10 of the “Company Law” clearly specifies the basis for appointing legal representatives, i.e., determined through the articles of association within the limits allowed by law. A legal representative must agree to serve as a director or manager executing company affairs on behalf of the company, thereby becoming a legal representative according to the provisions of the articles of association. Conversely, if the director or manager serving as legal representative resigns, it should be considered that he or she also resigns as legal representative.

This is because, regardless of whether the legal representative is a director or manager of the company, it is commonly held that a principal-agent legal relationship exists between the legal representative and the company. According to Article 933 of the “Civil Code“, both parties to a mandate contract have the right to arbitrary termination. Therefore, the legal representative also has the right to unilaterally terminate his or her position in the company, thereby dissolving the substantive connection with the company.

Therefore, if the removal requester has resigned from the positions of director or manager, they have lost the substantive basis for continuing to serve as the company’s legal representative. This point has been reflected in multiple precedents, such as (2023)浙0109民初17918号[2], (2023)赣0730民初1692号[3], and (2020)渝0103民初11853号[4], among others.

b. Whether All Internal Remedies Have Been Exhausted

Although the removal requester has a litigable interest, it does not mean that the court completely interferes with the company’s self-governance affairs but seeks a balance between the two interests. The judiciary remains cautious and restrained towards such matters, only considering judicial intervention when conflicts between the removal requester and the company cannot be resolved through internal self-governance mechanisms or when all internal remedies have been exhausted without resolution. Therefore, whether the removal requester has exhausted internal company remedies is a critical consideration in adjudicating such cases.

Regarding how to exhaust internal company remedies, for companies operating abnormally, such as being listed in the business abnormality directory or having their business licenses revoked, the court may likely recognize that the removal requester has no possibility of internal relief. For normally operating companies, the court may make different determinations based on the specific position of the removal requester in the company. For instance, for legal representative with roles such as chairman, executive director, or even shareholders, the court generally reviews whether the removal requester has convened boards or shareholders’ meetings regarding their resignation and re-election issues and whether they could not convene all shareholders to discuss the replacement of successors. For removal requesters holding only managerial positions, it is generally believed that at least they need to express their resignation wishes and removal requirements to the company explicitly, and if there are no results or refusal within a reasonable period. Such as in (2023)沪02民再23号[5]，(2023)渝0114民初1057号[6]，(2022)京02民终2059号[7].

3. Impact of the “Implementing Measures for the Administration of Company Registration” on the Mechanism for Assisting in the Execution of Removal

In recent years, even if the court supports the removal of registration matters, the prevailing party might still face execution deadlocks, where market supervision departments insisted on not processing the removal due to the lack of a successor. For example, in case（2023）沪0109执2407号案[8], during the execution process, the court issued a notice of assistance in execution to the Hongkou District Market Supervision Bureau of Shanghai, requesting assistance in handling the removal registration procedures. The bureau replied that the legal representative is part of the market entity registration matters, and since there is no information about a new legal representative, it cannot assist in processing the change.

In response, the “Implementing Measures for the Administration of Company Registration” will strengthen the responsibility of companies to comply with effective legal documents concerning past effective judicial judgments involving company registration matters. For companies failing to fulfill obligations within the deadline, the court can take compulsory measures according to law. It also clarifies the assisting obligations of registration authorities in removal execution. Furthermore, it requires the disclosure of removal information through the National Enterprise Credit Information Publicity System to enhance transparency.

Previously, Shanghai, Beijing, and other places have already introduced similar regulations. For instance, the Shanghai Market Supervision Bureau issued the “Several Measures for Deepening Reform of Operating Entity Registration Management and Optimizing the Business Environment” (沪市监注册〔2024〕61号) on February 23, 2024, and the Beijing Market Supervision Bureau released the “Notice on Issuing the ‘One Standard Four Dimensions’ Registration Promotion Measures for High-Quality Development of Operating Entities” (京市监发〔2024〕65号) on July 17, 2024, both clarifying the obligation of registration authorities to assist in the execution of removal registration.

Therefore, the aforementioned provisions on the obligation of company registration authorities to assist in enforcement have provided a feasible solution for the issue of handling the extinguishment of registration. Even if there are situations where the person subject to enforcement does not cooperate in processing enterprise information registration, company registration authorities still have the statutory obligation to assist the court in publicizing removal information in relevant company registrations, thereby achieving the effect of informing the public about the change registration matters. This system will resolve the connection issues between the court and company registration authorities during the execution of related judgments and help unify the different attitudes of company registration authorities across regions regarding removal registration. It provides effective implementation measures for the successful results of removal applicants, effectively resolving the dilemma faced by legal representatives and directors, supervisors, and senior management in smoothly stepping down in the market economy, realizing the legal effect of “removal”. It offers strong judicial support for optimizing the business environment and creates a more stable, fair, transparent, and predictable commercial environment for market participants.

Thanks to interns Jin Yicheng and Qi Zili for their contributions to this article!

Notes：

[1] 王惠廷请求变更公司登记纠纷再审民事裁定书，最高人民法院，(2020)最高法民再88号，2020.04.29裁判

[2] 王建国、杭州坤睿置业有限公司请求变更公司登记纠纷一审民事判决书，浙江省杭州市萧山区人民法院，(2023)浙0109民初17918号，2023.12.18裁判

[3] 赵立与赣州梁宁置业有限公司请求变更公司登记纠纷一审民事判决书，江西省宁都县人民法院，(2023)赣0730民初1692号，2023.05.25裁判

[4] 光大安石（北京）资产管理有限公司与重庆悠游光石企业管理有限公司等请求变更公司登记纠纷一审民事判决书，重庆市渝中区人民法院，(2020)渝0103民初11853号，2021.05.27裁判

[5] 饶军平与上海海韵商务咨询有限公司等请求变更公司登记纠纷审判监督民事判决书，上海市第二中级人民法院，(2023)沪02民再23号，2023.07.13裁判

[6] 李某某与彭水某某地产开发有限公司,重庆某某地产发展有限公司请求变更公司登记纠纷一审民事判决书，重庆市黔江区人民法院，(2023)渝0114民初1057号，2023.06.30 裁判

[7] 韬蕴（北京）影视投资管理有限公司与谢谦请求变更公司登记纠纷二审民事判决书，北京市第二中级人民法院，（2022）京02民终2059号，2022.02.28裁判。

[8] 倪岳与上海添一投资有限公司与公司有关的纠纷执行裁定书，上海市虹口区人民法院，(2023)沪0109执2407号，2023.08.31裁判

— 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