18 - A Comparison of Inbound and Outbound Investment Regulatory Regimes in China

Summary

We compare China’s foreign direct investment (FDI) and overseas direct investment (ODI) regimes, finding that, at a general level, whereas the former has transitioned from restrictive to lenient, the latter has evolved in the opposite direction, from lenient to restrictive. The different trajectories cannot be explained solely in terms of the time lag in their respective development. While the primary reasons for change are domestic, we argue that the FDI regime is more advanced because of the influence of the WTO accession of 2001. Whereas the FDI regime has become more streamlined, efficient and coordinated, partly as a result of the WTO accession package, the ODI regime, which has not yet benefited from an analogous multilateral framework, remains bureaucratic, suboptimal, and disaggregated. Our analysis is based on a data set of hundreds of normative documents that comprise the FDI and ODI regulatory regimes. We focus on the specific example of the regulation of the environmental impact of FDI and ODI. We find that the environmental and social impact of Chinese ODI is inadequately regulated, resulting in potential harms to Chinese investors and impacted communities in host states alike in the course of Chinese-financed projects overseas.

I Introduction

China is no longer only a major destination of foreign direct investment (FDI) but is one of the highest exporters of overseas direct investment (ODI) in the world. The two different legal and regulatory regimes for FDI and ODI are often conceptualized separately with the former being more advanced than the latter. The conventional explanation for this difference is that the former has simply had more time to develop, given that China opened to FDI in the 1980s, and it was not until the late 1990s that Chinese enterprises began investing abroad. We stake out a different position on the relationship between the FDI and ODI regimes. Rather than treat them as isolates, we juxtapose them (Bath, 2011) while recognizing that they are organized through different principles.

In accordance with a line of literature that conceptualizes domestic and foreign-related Chinese governance holistically (Foot, 2013; Ferchen, 2016; Shue, 2018; Erie, 2021), we compare the FDI and ODI regimes, finding that, at a general level, whereas the former has transitioned from restrictive to lenient, the latter has evolved in the opposite direction, from lenient to restrictive. The different trajectories cannot be explained solely in terms of the time lag in their respective development. While the primary reasons for change are domestic, we argue that one reason why the FDI regime is more advanced is because of the influence of the WTO accession of 2001. Whereas the FDI regime has become more streamlined, efficient, and coordinated, partly as a result of the WTO accession package, the ODI regime, which has not yet benefited from an analogous multilateral framework, remains bureaucratic, suboptimal, and disaggregated.

Our analysis is based on a data set of hundreds of normative documents that comprise the FDI and ODI regulatory regimes. For the most part, we have focused on normative documents issued by the People’s Republic of China (PRC) government that pertain to FDI or ODI governance to provide a more granular view than a focus on the level of China’s international investment agreements (Berger, this volume; Chi, this volume). For a number of reasons, including the breadth of documents that comprise these regimes and also our shared interest in China’s impact on the environment, we focus on the specific example of the regulation of the environmental impact of FDI and ODI. Environmental concerns are closely related to a host of problems that have emerged in recent years as the most pressing problems for international trade and investment law, including technology transfer, climate change mitigation and adaptation, the protection of biodiversity, and pandemics (Cottier, this volume). Our particular focus is on how the FDI and ODI regimes have disparately affected environmental impact in China and developing countries, respectively. We find that the environmental and social impact of Chinese ODI is inadequately regulated resulting in potential harm to Chinese investors and impacted communities in host states alike in the course of Chinese-financed projects overseas. The remainder of this chapter is organized as follows: in Part II, we provide a snapshot of China’s capital inflows and outflows; in Part III, we provide an historical overview of China’s regulation of FDI, finding a general transition from restricting FDI to encouraging it; in Part IV, we provide a similar historical appraisal of China’s regulation of ODI finding that the general trend works in the opposite direction; in Part V, we juxtapose the two regimes’ treatment of environmental impact; and in Part VI, we provide a brief discussion of implications, including for understanding the relationship between China’s domestic legal reform, outward-facing legal obligations, and the role of regulators in coordinating the foregoing.

II Trends in Chinese Capital Import and Export

As a preliminary matter, we recognize that FDI and ODI serve different purposes and do not assume that they should necessarily function in the same way; in fact, our comparison is meant to shed light on the different types of priorities a state may have in reforming the respective regimes. In considering the priorities that underlie the regimes, it is clear there are differences. For example, whereas FDI rules are designed to attract capital and technology, ODI rules aim to assist Chinese companies to obtain resources and to transfer excess capacity in manufacturing. There are some shared underpinning principles, however, even if they assume different levels of importance in the two regimes. These include both national security and the encouragement and protection of investment.¹ So while there are clearly different reasons for the capital flows, there is also some overlap.

The overlap also applies to the regulators who determine capital inflows and outflows as they are essentially one and the same; despite this commonality, the regimes have evolved in quite different directions. The regulators include inter alia the Ministry of Foreign Trade and Economic Cooperation and its successor the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC), the Ministry of Finance, the Ministry of Foreign Affairs, the State Administration for Industry and Commerce, the State Administration of Foreign Exchange, and the People’s Bank of China. It is important to note, however, that economists, political scientists, and other social scientists who study China have consistently shown that regulators in China do not act with one mind, but rather, may exhibit significant inter-agency competition (Lieberthal, 1992; Mertha, 2008; Jones and Hameiri, 2021; Tan, 2021). Moreover, in the face of these agency problems, scholars have argued that the WTO accession presented China with an opportunity to circumvent entrenched discoordination problems and to marshal resources across the ministries, departments, and related administrative divisions (Kim, 2002; Qin, 2007). Indeed, the WTO accession was an exercise in institutional learning and problem-solving that required an unprecedented level of coordinated action (Hsieh, 2010; Ji and Huang, 2011; Shaffer and Gao, 2017). Yet while regulators underwent a steep learning curve to reform the FDI regime in light of the WTO accession package, there was no comparative multilateral framework for China’s ODI regime and thus the same reformers have not undergone a similar process of coordinated learning. In the following sections, we take the FDI and ODI regimes in turn.

III China’s Regulation of FDI

At a general level, China’s regulation of FDI has gone from more restrictive to more lenient, and, while there are a number of factors that contributed to this shift and most of which are domestic in nature, we argue that one reason for this change is the requirements imposed on China through the WTO accession package, a multilateral framework that has no corollary in terms of China’s regime for regulating ODI. More specifically, China’s approach to regulating FDI was caused by its “opening and reform” policy and the country’s willingness to engage with global capital. China’s commitments to joining the WTO, including making China a market economy and opening the domestic market to foreign investors, should be seen in this broader context.

We construct a basic chronology of the evolution of China’s FDI regime. We find that China’s evolving FDI framework coincides with China’s national development plans as it transitioned from a command-control economy to one that increasingly integrated market principles without total privatization. This timeline can be broken down into five general phases: phase one (1979–1991), the establishment of a basic regulatory foundation for economic liberalization; phase two (1992–1999), an increased emphasis on economic efficiency causes legislative reform; phase three (2000–2008), the period of the WTO accession during which the government sought to internationalize by balancing economic efficiency with economic fairness; phase four (2009–2014) during which the government sought to balance internationalization with national security concerns; and phase five (2015-present) which is marked by not only efficiency and national security concerns but also greater openness and quality of cross-border business. In what follows, we trace China’s gradualist approach to investment reform with particular reference to the pivotal phase three during which China’s accession to the WTO shifted its FDI regime toward greater liberalization, yet one responsive to China’s specific political economy.

(i) Phase One (1979–1991): The Establishment of a Regulatory Foundation for Economic Liberalization

The first phase of building a house amenable to foreign investment began in 1979 and lasted until the early 1990s. At this early stage in modern China’s development, the PRC government sought to incentivize FDI to inject capital into the forces of production, specifically those in light industry, agriculture, and heavy industry. The landmark event of the Third Plenary Session of the Eleventh Central Committee of the Chinese Communist Party (CCP) explicitly promoted legislation for foreign investment. Subsequently, the Sino-Foreign Equity Joint Ventures Law was promulgated in 1979 as the first legislation of the “socialist market economy” (shehuizhuyi shichang jingji). Three years later, the 1982 PRC Constitution gave legal recognition to foreign businesses and foreign-invested enterprises.²

In this phase, China’s regulation of FDI is particularly strict and shows the following characteristics. First, regulators restricted access to foreign capital. The legislation establishes categories for investment (e.g., encouraged, permitted, restricted, prohibited), only some of which were slowly relaxed over time. Moreover, the regulations provide for approval and management of a number of areas, including the capital ratio of the parties involved,³ and approvals for foreign-invested enterprise contracts and articles of association,⁴ among other restrictions.⁵ Second, regulators further exercised strict approval for foreign investment. Foreign-invested projects were, for the most part, discouraged, and the approval authority was concentrated at the level of the central government. The process for approval was cumbersome.⁶ Third, foreign investment was not granted national treatment. Moreover, there were a number of restrictions placed on the purchase of raw materials as well as on the import and export of products,⁷ and, lastly, foreign exchange.⁸ Fourth, both the methods to encourage foreign investment and the ultimate destinations were limited. As for methods, the main approach was to provide preferential income tax treatment for foreign-invested enterprises.⁹ In terms of the permissible destinations for investment, the PRC government at this stage encouraged foreign investment only in designated locations.¹⁰ In summary, the first phase is one of tight restrictions on amounts, methods, industries, and destinations of foreign investment.

(ii) Phase Two (1992–1999): Economic Efficiency Spurs Legislative Reform

In the second phase, some of the investment rules became more consolidated around the need to increase efficiency which, in turn, generated the need for legislative and regulatory reform. This phase is characterized by a number of features. First, the system for foreign investors to access Chinese markets became more regularized.¹¹ Whereas the categories for foreign investment were ill-defined in the first phase, in this phase, they became clearer under the Catalogue for the Guidance of Foreign Investment Industries, specifically, its categories of “encouraged,” “permitted,” “restricted,” and “prohibited.” Second, the authorities simplified the foreign investment approval system.¹² Third, foreign investments began to receive national treatment, in certain circumstances. Some foreign-invested enterprises even received “super-national treatment” (chaoguo minteyu). For instance, the PRC Foreign-Invested Enterprise and Foreign Enterprise Income Tax Law grants foreign-invested enterprises the “two exemptions and three reductions” tax preference, and further stipulates that local governments can exempt or reduce local income tax.¹³ Fourth, authorities expanded both the scope of foreign investment and the permissible destinations. An example of the former is the inclusion of “build-operate-transfer” projects within the investment regime¹⁴ and the latter widened the type of destinations for foreign investment to include inland areas (Guojia tongji ju, 2002). In short, the second phase began greater liberalization but this process would not fully gain momentum until the WTO accession.

(iii) Phase Three (2000–2008): Internationalization through WTO Accession

In advance of its accession to the WTO in 2001, China began to reform its legislative and regulatory framework for FDI on a large scale in conformance with WTO expectations, and in particular, sought to meet the goals of both efficiency and economic fairness. The package agreement of the WTO had a significant influence on the reform of Chinese legislation, that is, the overall alignment of Chinese law with international norms, even if there was regulatory discoordination between different levels of government administration (Tan, 2000). According to the internal documents of the Working Party on the Accession of China, by November 9, 2000, the PRC government revised some 36 laws and regulations and 120 administrative rules for purposes of WTO compliance, including such statutes as the Contract Law of the PRC, Law of the PRC on Chinese-Foreign Equity Joint Ventures, and Law of the PRC on Chinese-Foreign Contractual Joint Ventures (Working Party on the Accession of China, 2000).

The changes to the investment regime were extensive. First, foreign investment access was expanded across industries, methods, and destinations. The Catalogue for the Guidance of Foreign Investment Industries was revised three times during this period to narrow the restricted and prohibited categories. Concurrently, separate policies were formulated for many industries to further expand opportunities for foreign investment, including in the financial, transportation, real estate, and entertainment industries.¹⁵ Second, legislative reform began focusing on fair value. In 2004, the State Council promulgated the “Decision on the Reform of the Investment System” which stated that a fair and orderly competitive market environment promotes both investment efficiency and overall social progress.¹⁶ Based on this direction, reforms were initiated in a number of areas. For instance, the 2007 Corporate Income Tax Law unified the income tax of domestic and foreign companies and abolished the “super national treatment” of some foreign-invested companies.¹⁷ Additionally, the Anti-Monopoly Law provided a basis for regulating foreign monopolies and mergers and acquisitions.¹⁸ Third, during this period, China’s policy orientation shifted from “encouraging foreign investment” to “relying on foreign investment.” This trend is illustrated in the use of foreign capital to reorganize SOEs and foreign mergers and acquisitions.¹⁹

(iv) Phase Four (2009–2014): Balancing Internationalization and National Security

The WTO accession continued to have transformative effects on the Chinese regulatory regime for FDI well beyond the third phase, and while efficiency continued to drive much of the reform, this requirement was balanced with additional concerns, including national security. The 2008 financial crisis increased international pressure on China to adapt its regulatory structure to resist exogenous shocks while continuing to benefit from FDI. Hence, on the one hand, foreign investment regulations maintained the goal of pursuing efficiency.²⁰ As part of this process, the approval system was further simplified to delegate approval to lower-level administrative levels.²¹

On the other hand, whereas the WTO era ushered in the notion of “reliance” on foreign investment, the worldwide financial meltdown of 2008 tempered this view. National security and economic sovereignty became important counter-weights to foreign investment dependence. Consequently, the Catalogue for the Guidance of Foreign Investment Industries was revised successively to incorporate national security, and a raft of regulations was issued to introduce greater oversight into the system of mergers and acquisitions.

(v) Phase Five (2015-present): Embracing “Quality” FDI

In the most recent phase, the government has sought to increase openness to FDI while also improving the overall quality of FDI. In 2015, the Central Committee of the CCP and the State Council jointly issued the “Certain Opinions on Building a New System of Open Economy” which required that while China should expand market access in the service industry and further open up manufacturing, it should improve the quality of foreign investment.²² This latter requirement led to adding a negative list to pre-access national treatment.

The NPC promulgated the Foreign Investment Law in 2019 which introduced major changes to unify the regimes for regulating domestic and foreign investment.²³ Specifically, the Foreign Investment Law abolished the trinity of WFOEs, equity JVs, and cooperative JVs. In their place, the new law permits investment from Chinese or foreign parties without the target company needing to change its legal form. Henceforth, corporate form and governance are determined by the Chinese company law, which relaxed some of the requirements foreign investors faced under the previous arrangement. Another purpose of the Foreign Investment Law was to further establish the national security review system for foreign investment. The most recent phase has also seen an encouragement of “quality” investment, particularly in the fields of science and technology. For example, the Foreign Investment Law encourages technical cooperation and includes the protection of IP rights.²⁴

In summary, this brief chronology of the reform of the legislative and regulatory framework for FDI shows how it has shifted over time from one that was initially restrictive to one that encouraged low-level foreign investment, without a screening mechanism, to the current phase that encourages quality investment, albeit with a screening mechanism in place. These changes over time reflect the general priorities of national development. Specifically, the PRC government viewed the WTO accession as a catalyst for creating a system that was more conducive to attracting FDI. Yet this need has been counter-balanced, over time, with the priority on safeguarding national security.

IV China’s Regulation of ODI

Compared with China’s legal and regulatory system for governing FDI, which has evolved from more restrictive to more lenient, the legal and regulatory system for ODI has shifted from one of greater lenience to more regulatory control. By control, we mean regulatory tightening; the control does not mean prohibition. Further, control in this sense is a response to a variety of chronic investment failures from speculative investing in luxury sectors in developed economies to high-risk investments in low-income states. In assessing the underlying principles of the ODI regime, one difference with the FDI regime is that the former prioritizes mitigating risks that could harm the national interest.²⁵ Chinese investors have incurred losses as a result of failed investments, and especially when the investments are state-owned, they potentially endanger state interests abroad.

In addition, poorly governed Chinese investments also generated negative externalities for host states. Whereas foreign investors in China must comply with Chinese environmental and social governance laws, the Chinese ODI regime does not have the corresponding safeguards. The lack of such compliance measures has caused human rights and environmental harm in a number of countries, particularly those with nascent legal systems. We argue the reason for the ODI regime’s change from lenient to strict is that, unlike the case of FDI, there was no external-facing process, such as the WTO accession, which reformed domestic priorities in line with international ones, specifically to balance home and host state interests in the course of cross-border capital outflows.

Many of the regulators for ODI are the same for FDI. Specifically, the administrative management of ODI is led mainly by the NDRC and MOFCOM. These entities often issue joint rules, including departmental regulations and other normative documents. However, additional departments may also participate in the drafting and issuance of these rules, including the Foreign Exchange Administration, People’s Bank of China, State-Owned Assets Supervision and Administration Commission (SASAC), Ministry of Finance, and Ministry of Foreign Affairs. One result of this pattern of multiple departments and administrators shaping the regulatory environment is inconsistency in rule design and enforcement as well as asymmetrical powers between departments. Likewise, given that each department issues rules within its purview (and sometimes jointly), there is no unified law regulating ODI. Moreover, policies that follow from scattered regulations and multiple and overlapping authorities lack clarity, stability, and rigor. In short, there was no WTO-centralizing force which could realign the authorities and coordinate their normative effects.

The current regulatory system for ODI can be divided into two historical phases. Phase one (1999–2015) was the formative period of China’s “going out” (zouchuqu) strategy and phase two (2015–present) features the “Belt and Road Initiative” (BRI). The phases show, at a general level, a shift from a more permissive and decentralized regime that encouraged ODI to one that is characterized by a more restrictive “encouragement catalogue and negative list” (guli mulu fumian qingdan).

(i) Phase One (1999–2015): The Formative Period of China’s “Going Out” Strategy

After the Asian financial crisis of 1997, the Chinese government implemented a strategy to expand exports. The “going out” strategy entered the national development plan in the Tenth Five-Year Plan for National Economic and Social Development, issued in 2000.²⁶ Six years later, the State Council adopted the Opinions on Encouraging and Regulating Foreign Investment and Cooperation among Chinese Enterprises.²⁷ During this period, the government promoted dual-direction development, namely, that of “going out” and also “attracting in [FDI]” ([张建平] and [刘恒], 2019).

The regulatory framework for ODI during this period was formulated chiefly by the NDRC and MOFCOM, reflecting their status as the leading twin ministries. The overall trend of the regulation was a process of gradual simplification for the administrative procedure for ODI. The NDRC’s regulations for ODI underwent two important changes. The first change occurred in 2004, under the Interim Measures for the Administration of Approval of Overseas Investment Projects, which reflected a shift from an audit to an approval (filing) system for Chinese enterprises engaged in ODI.²⁸ Subsequent normative documents further refined this system, including distinguishing those enterprises that rely on government funding as well as identifying approval systems for “special” or “sensitive” projects.²⁹ The second change occurred in 2014 when the NDRC established a “filing-based and approval-based” project management system, replacing the earlier 2004 decree. This regulation further specified two categories of “sensitive” projects, based on investment destination and industry, which required approval by the NDRC regardless of the investment amount.³⁰ The NDRC’s regulatory changes in 2004 and 2014 are roughly mirrored by those of MOFCOM which also decentralized the approval authority and simplified the approval process for ODI.³¹ In short, this early phase is characterized by a generally lenient approach to approval for ODI projects.

(ii) Phase Two (2015-Present): The BRI

In March 2015, three Chinese government ministries jointly issued the “Vision and Actions on Jointly Building Silk Road Economic Belt and the Twenty-First Century Maritime Silk Road” (hereinafter, “Vision and Actions”), inaugurating the BRI.³² Since then, China’s ODI administration and sectoral legislation have been closely tied to the BRI. The promotion of the BRI led to a peak in Chinese ODI and equity investment in 2016, an increase of 44 per cent from the year before (Bank, 2021). However, massive Chinese ODI in real estate, luxury hotels, sports and entertainment, and related industries not only failed to drive domestic economic development but also led to capital outflows not tied to state-led strategies, ultimately triggering the Chinese government’s concerns about financial security and the safety of state-owned assets.

Subsequent normative documents built upon the Vision and Actions which is mainly an agenda-framing document. Specifically, guidance from the ministries adjusted the “filing and approval” regulatory approach to one based on “encouraging development” alongside a negative list.³³ In particular, ODI was divided into the following categories: encouraged, restricted, and prohibited. NDRC decrees for their part defined eight categories of ODI, abolished the previous reporting system, and narrowed the scope of projects that can be approved.³⁴ These decrees also introduced a post-event reporting system that specifies that a report must be submitted within five days of a material adverse circumstance in an investment project (e.g., significant causalities among expatriates, significant loss of assets abroad, or damage to the diplomatic relations with the host state).³⁵ The NDRC further formulated the Catalogue of Sensitive Sectors for Overseas Investment in 2018 which requires approval.³⁶ The NDRC has, during this phase, consolidated its authority over ODI, and requires that overseas investment by domestic entities, whether financial or non-financial, direct or indirect, be uniformly included in the scope of filing and approval by the NDRC.

MOFCOM also assumed greater authority over ODI under the new direction of this second phase. MOFCOM, together with other ministries, jointly issued new measures for the filing and approval of ODI projects.³⁷ These measures standardized the management of ODI by requiring a summary report of approval, supervision during and after the project, and a model for ODI that was characterized by “encouraging development plus negative list.”³⁸ The summary report of approval must include inter alia information pertaining to any outbound investment and merger and acquisition, the progress of ODI projects, any problems encountered including compliance issues with local law and regulations, the protection of the environment, and the protection of employees’ rights.³⁹ Additionally, any adverse event or security incident (including security accidents, terrorist attacks, and kidnappings, social security mass incidents, major negative public opinion reports, etc.) must be reported to the relevant competent department which then informs MOFCOM.⁴⁰

Is it significant that the NDRC was not an issuing department for the measures led by MOFCOM? While the regulatory regime for FDI also demonstrates elements of inter-agency competition, the discoordination is greater in the ODI regime. The reason for this is not just the comparatively short period of evolution for the ODI regime but also that there was no external pressure put on the various departments and ministries to achieve greater coordination as was the case with the WTO accession. In the next section, we examine the extent to which the two regimes have integrated concerns about environmental impact.

V A Focus on Environmental Impact

China’s regulation of the environmental impact of FDI is much more developed than its environmental regulation of ODI, and while this difference can be explained, in part, by the long history of FDI in China, we argue that because regulation of the environmental impact of FDI grew out of a policy environment wherein China was integrating its national development plan into the global economy through multilateralism, this framework has led to a more robust result than regulation of the environmental impact of ODI. In this section, we briefly review the regulation of the environmental impact of FDI and then the regulation of the environmental impact of ODI to contrast the two regimes. We find that whereas the former suffers from a number of shortcomings, it nonetheless has gained some degree of traction in shaping foreign-invested enterprises conducting business in China. In contrast, the regime for ODI features far more severe “bugs,” including a fundamental structural flaw: the limited jurisdiction of the Ministry of Ecology and Environment (MEE).

(i) Regulation of the Environmental Impact of FDI

Whereas the regulation of the environmental impact of FDI has had a long gestation period, China’s trade obligations have further incentivized environmental considerations in the course of planning foreign-invested projects. In the early period of the “opening and reform,” regulations often did not explicitly state whether they applied to FDI as the operative concept at the time was territoriality, that is, as long as a project was undertaken within the PRC – regardless of the source of the capital (domestic or foreign) – then the environmental rules applied.⁴¹ The 1995 Catalogue for Guidance of Foreign Investment Industries further provided more detailed provisions for defining pollution-intensive industries and categories them accordingly (Zeng and Eastin, 2011, 58).

Consistent with phase three identified above (2000–2008), during the accession period, China adopted a number of laws including the Environmental Impact Assessment Law (hereinafter, “EIA Law”), passed in 2002, which further regulated FDI.⁴² The EIA Law was notable, in particular, for encouraging the public to participate in EIA.⁴³ Scholars have criticized the EIA Law for poor implementation, however, and have noted the disconnection between the EIA Law and China’s trade regime (Zhao, 2007, 80). In fact, progress made in China’s domestic environmental governance since the EIA Law was passed has been chiefly due to domestic reasons, namely, the severity of industrial pollution, the growth of political will and pressure from political leadership, and the emergence of China’s environmental movement (Economy, 2004, 62–75; Mertha, 2008, 6–12; Stern, 2013, 25–27).

While reforms, especially those across legal domains such as environmental protection and trade, do not unfold in a unilinear manner, in recent years, the EIA system has become much more stringent through streamlined administration, delegation of powers, and improved service (Yang, 2020, 890–891). The reform of the EIA occurred hand-in-hand with the establishment of the MEE, which replaced the Ministry of Environmental Protection, in 2018. The MEE differs from its predecessors in that it consolidates powers that were previously scattered throughout a number of different regulatory bodies (Yang, 2020, 890). The consolidation of authority under the MEE has been part of an increasing effort to refine the regulation of the environmental impact of investment (Karplus et al., 2021, 315–316), and, yet, as we argue below, there is still room for improvement.

(ii) Regulation of the Environmental Impact of ODI

China’s ODI regime is designed with the objectives of serving the BRI and safeguarding the safety of state-owned assets and their financial security. The environmental and social impact of offshore projects has not been a core concern of the Chinese government. As such, there is no legislation with enforcement effect to screen the environmental and social impact of overseas investment projects. Institutionally, the MEE, the main administrative agency in charge of environmental affairs in China, also does not have the mandate to regulate overseas projects.

There is no doubt that, rhetorically, there is a degree of BRI green-washing. The Vision and Actions, for example, state the need to “highlight the concept of ecological civilization in investment and trade, strengthen cooperation on ecological environment, biodiversity, and climate change, and build a green Silk Road.”⁴⁴ Accordingly, the MEE, either alone or jointly with other ministries, has issued a number of policies related to the environmental protection of overseas investments. However, common features of these policies are they are voluntary, not legally binding, and as such, lack enforceability (Boer, 2019; Coenen et al., 2020). Examples of these normative documents include the following: the CBRC’s Green Credit Guidelines of 2012,⁴⁵ the Environmental Protection Guidelines for Foreign Investment and Cooperation of 2013,⁴⁶ the Guiding Opinions on Promoting the Construction of the Green “BRI” of 2017,⁴⁷ the “BRI” Ecological and Environmental Protection Plan of 2017,⁴⁸ the Guidelines for Green Development of Foreign Investment Cooperation of 2021,⁴⁹ and the Ecological and Environmental Protection Guidelines for Overseas Investment Cooperation Construction Projects of 2022.⁵⁰

In summary, while these guidelines and codes of conduct signal an awareness for including environmental impact in ODI planning, they mostly fall short in affecting corporate governance. It should be noted that not only Chinese ministries but also private organizations including chambers of commerce have also issued such soft law sources. For example, the China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters has developed industry guidelines related to environmental protection for ODI in the mining industry.⁵¹ The “Green Investment Principles [for the BRI]” which was jointly issued by the Green Finance Committee and the City of London Corporations’ Green Finance Initiative in 2018.⁵² Whereas some 37 financial institutions have signed on as of 2020, it is wholly voluntary. Strikingly, the Supreme People’s Court (SPC) has cited the Green Investment Principles in its own opinions, reflecting that the SPC has no national legislation to cite or enforce and instead must cite industry guidelines.⁵³

In contrast, among the legally binding regulations on overseas investment, there are few provisions for environmental and social impact assessment requirements. One exception is transboundary water resource development and use projects which are classified as sensitive by both the NDRC and MOFCOM, requiring approval rather than filing.⁵⁴ It is likely that the reason why transboundary water resource projects are listed as sensitive is the Myitsone Dam project in Myanmar. The Myitsone project, the world’s fifteenth largest hydropower plant, in which the China Power Investment Group began investing in 2006, was halted by the Myanmar government in 2011 due to opposition from the local population (Bian, 2018, 236–237). However, neither the NDRC nor MOFCOM requires environmental impact assessments for sensitive projects. Transboundary water resource projects are required to be registered for the purpose of protecting the security of Chinese overseas investment and risk mitigation, rather than on the basis of environmental impact considerations.

Lastly and related, in terms of both legislation and enforcing institutions, Chinese authorities are limited to governing environmental issues only within the PRC and not in the course of overseas projects. Both the Environmental Protection Law and the EIA Law apply to matters only within the PRC.⁵⁵ Likewise, whereas both the NDRC and MOFCOM have responsibilities for regulating overseas investment projects,⁵⁶ the MEE has no such responsibility and thus no authority to regulate environmental concerns in projects abroad. Thus, there are hard limits placed on both the reach of regulators and the legislative basis upon which regulators, namely, the MEE, could govern the environmental impact of ODI. The overall picture is that China is an outlier in a growing trend of states’ regulation of their overseas investments in terms of their impacts on host states’ environments and social governance, including human rights.⁵⁷

VI Implications

Comparing the reform trajectories of the FDI and ODI regimes has a number of implications for the study of Chinese domestic legal reform, its outward-facing legal obligations, and the role of regulators in coordinating the foregoing. Scholars have shown how the WTO accession process required Chinese regulators, policy makers, and academics to harmonize the WTO obligations with China’s national development plans (Gao, 2021; Shaffer, 2021). One result is a degree of coordination between ministries, departments, and administrative units that otherwise may not exist. The ODI regime presents in many ways the counterfactual: there was no similar multilateral framework through which the Chinese regulators learned to balance the needs of China’s national development with its obligations to host states. The result is discoordination and inefficiency that affects Chinese investors and host state alike.

This discoordination has specifically affected projects under the mantle of the BRI. As Min Ye (2020) has shown, the BRI was itself, in part, a response to state fragmentation. When Xi Jinping announced the BRI in 2013, it was a “whole-of-government and whole-of-society” call to implement projects that would support the BRI. Yet nearly a decade into the BRI, it is clear that inter-agency coordination has not been attained through internal efforts alone (Hale et al., 2020). To date, there has been no external framework through which BRI-related investment can undergo the type of institutional learning curve which Chinese regulators experienced through the WTO accession. Famously, proposals to conclude a multilateral investment treaty within the Organization for Economic Cooperation and Development (OECD) failed in 1998 due to civil society groups’ opposition (Joseph, 2013, 843).⁵⁸ China’s investment strategy remains reliant on piecemeal bilateral investment treaties, many of which are dated (Chaisse and Kirkwood, 2020). Inter- and intra-sectoral learning among enterprises remains nascent, compliance with local law remains a perennial problem, and, as a result, disputes arise that are addressed through international commercial arbitration, political intervention, or, increasingly, host state courts (Erie, 2021).

Perhaps ironically given the history of the failed OECD multilateral investment treaty, it is, in many cases, civil society groups in host states that are the source of Chinese enterprises’ learning about local law, including the environmental and social impact of investment through protest and litigation (see e.g., Reporters, 2017; Zhongguo lüfahui [China Greenification Society], 2019). Certainly, much of the responsibility for protecting the environment of host states falls on local regulators, and not Chinese ones, given that most Chinese investors incorporate companies under local law. Yet for the BRI-like projects to truly promote sustainable development, Chinese regulators, and, specifically, the MEE, can also provide greater guidance for outbound investment, but only if an enforceable ODI law granted them such authority. Indeed, the Fourteenth Five-Year Plan (2021–2025) states the government will “promote ODI legislation.”⁵⁹ Although it lacks details, it is hoped that the legislation would regulate highly polluted and carbon-intensive ODI projects and grant the MEE authority to screen the environmental, climate, and social impact of ODI projects in order to assure China’s climate pledge of carbon neutrality by 2060. While we applaud the inclusion of this ODI law in the future plan, along with communities in host states, we look forward to its practical implementation.