Accessing Chinese investment

A guide for mining and resource infrastructure clients



First published in March, 2015.

The resources sector was one of the hardest hit by the credit crunch. Drops in commodity prices and the absence of debt for project developments caused share prices of corporates to remain under pressure.

As is usual in such situations, the market has adapted. We have seen a significant increase in the amount of Chinese banks and ECA financings, as well as an increase in the number of acquisitions of existing mining and associated infrastructure businesses or stakes by Chinese State Owned Enterprises. We discuss some of the options for accessing Chinese capital for mining and associated resource infrastructure.

China Export & Credit Insurance Corporation (SINOSURE) 

SINOSURE is the official export credit agency (ECA) of the PRC. It was established in 2001 and took over roles previously filled by People’s Insurance Company of China and The Export-Import Bank of China (C-EXIM). C-EXIM is not an official ECA, but is regarded as a ‘policy bank’ providing support (in the form of direct funding) to the economic/political policies of the PRC.

It was not until 2003 that SINOSURE began writing policies covering classic ECA export risks – commercial credit risk and political risk. Like many export credit agencies the bulk of SINOSURE’s business is in short term support for Chinese exports. However its medium and long term underwriting has grown substantially in recent years – all very much in line with the Chinese government’s stimulus package for the economy.

SINOSURE has representative offices and branches across China and it is to the local office that the Chinese exporter will usually address its initial request for cover. A foreign project company seeking SINOSURE support for its project due to, for example, the involvement of a Chinese EPC contractor, will need to access SINOSURE through its financial adviser or the relevant Chinese EPC contractor – the foreign project company will not itself have direct access. This application process is typical of access to other ECA cover.

Requests for medium and long term SINOSURE cover are processed through the head office in Beijing and are subject to approval by the Ministry of Commerce (MOFCOM) for cover in excess of US$30 million and by the State Council for cover in excess of US$100 million, although these thresholds vary from time to time. Discussions with SINOSURE are usually begun by the Chinese exporter/EPC contractor and then taken up by the bank arranging the buyer credit facility. There is usually little or no contact with the buyer/borrower.

China is not a participant in the OECD gentlemen’s agreement on official support for export credits (the Consensus), but SINOSURE is nonetheless represented at the Berne Union and complies with the Consensus. SINOSURE provides up to 95 per cent cover for political risks and has traditionally limited commercial risk cover to 50 per cent, however in the current market there is now some flexibility in the level of cover for commercial risks and some transactions have closed with up to 95 per cent commercial cover. The percentage of cover is run against the amount of the contract value which SINOSURE is able to support i.e. up to 85 per cent of the total contract value, in common with other ECAs.

SINOSURE cover is available for both Chinese and foreign banks who meet certain criteria (including a track record in export credits), although the foreign bank must have a branch in PRC (a representative office is not sufficient).


As with all export cover, SINOSURE cover is only available in support of exports of the host country (i.e. Chinese goods and services). This can be a flexible concept but the Chinese content should be at least 60 per cent of the value of the export contract/project (although this threshold can vary from time to time and from project to project – until recently 70 per cent was a more typical requirement). The greater the Chinese connection to the project (in terms of economic interest for the PRC), the better the chance of obtaining cover and MOFCOM/State Council approval. The China content requirement is somewhat opaque, but looks to the actual level of goods/services originated in the PRC or otherwise eligible for SINOSURE cover as determined by SINOSURE, i.e. if the EPC Contractor is Chinese but subcontracts the construction to a non-Chinese entity and/or sources relevant equipment and supplies from outside China, this may breach the China content requirement. Ultimately, sign off must be sought from SINOSURE up front, with the risk then passed to the Chinese bank and contractor going forward, (i.e. no event of default under the loan agreement for breach of China content, and an obligation on the EPC contractor in the EPC contract to ensure compliance with China content).

It is preferable for the purposes of obtaining SINOSURE cover that the export contract/project should generate a supply of strategically interesting products or natural resources for China. However, we should note that the existence of a Chinese offtaker would not typically by itself satisfy the conditions for SINOSURE cover of debt into a project, irrespective of the value of that offtake contract – the cover is really in place to assist export of goods/services from China. However, assuming the requisite level of goods/services were supplied into a project, such an offtake would no doubt assist the likelihood that SINOSURE will be interested in providing cover in relation to such a project. Further, SINOSURE may be more willing to provide cover in relation to a project if there is an element of Chinese equity investment involved, in view of the stated policy of the PRC to promote and ensure acquisitions of interests in foreign assets, particularly strategic resource assets. It is important to appreciate the global strategic interests of the PRC and the relative position of any contractor and any export contract/project in the hierarchy of those interests.

Although obtaining an initial response on underwriting from SINOSURE can be relatively quick – within a week of SINOSURE receiving a complete file – the full process can get very bogged down as the underwriting request is processed through MOFCOM, and even more so if it has to go to the State Council. The process can take between three and six months to complete. The length and relative opacity of the process form the basis of negative comments about dealing with SINOSURE. However, SINOSURE has made significant progress in both transparency and turn around times (barring the MOFCOM/State Council process).

As a state policy institution SINOSURE is subject to directions given to it by MOFCOM. New directions apply to cover from time to time, which SINOSURE has conditionally approved but which have not become the subject of binding policies, and can also apply retrospectively. From late 2008, SINOSURE began to require that all buyer credits be supported by a guarantee – preferably a state guarantee and for private sector buyers a parent company guarantee. More recently (from 2009) MOFCOM has required that Chinese banks should hold a majority of any funding supported by SINOSURE.

In current market conditions accessing either SINOSURE cover or C-EXIM funding is a possibility that few can ignore. SINOSURE has significantly expanded its capacity to underwrite transactions and has upgraded its country risk analysis and its country limits. Moreover it has experienced a huge surge in demand for its services and it struggles to keep pace.

Accessing Chinese bank/ECA facilities - a Q&A

Although we refer to The Export-Import Bank of China (C-EXIM) as an ECA, we should clarify that C-EXIM is not strictly an ECA but a state owned ‘policy’ bank through which official support is provided on terms that closely follow the OECD guidelines on export credits; SINOSURE is the only official Chinese ECA.

What level of Chinese bank/ECA facilities are offered? Is there any limit? Can a commercial loan amount be larger than the portion covered by an ECA guarantee/insurance cover?

There is no absolute fixed limit to the facility amount when accessing funds from Chinese institutions – we have advised on loans from hundreds of millions up to tens of billions from Chinese institutions.

Chinese commercial banks are willing to provide both covered and uncovered facilities, although typically Chinese funding of commercial loans (particularly from a single lender) on a single project will be either ECA covered in full or fully uncovered, rather than partially covered and partially uncovered.

However, there are certain limitations on the amount of cover which can be obtained from Chinese ECAs:

a) In common with all other ECAs, Chinese ECA cover is limited to an amount equal to 85 per cent of the relevant export contract value, and the 15 per cent contribution/down-payment from the project company is typically required as a condition precedent to loan disbursement/ECA guarantee provision. This 85 per cent threshold is set by the OECD guidelines on export credits, although currently there are many temporary rules in place that have allowed ECAs to cover higher percentages and broader categories of eligible goods.

b) For single asset project finance SINOSURE has typically only provided up to 50 per cent commercial risk cover and up to 95 per cent political risk cover however, when a parent company guarantee is provided (as is now typically required), particularly if of substantial credit value, it can provide up to 95 per cent commercial and political risk cover. As more and more ECAs take measures to increase the percentage of cover that they can offer, we would expect SINOSURE to follow suit and become a much more influential source of cover in this respect – this is certainly the mandate from the Chinese state as it seeks to develop its strategic macro-economic interests.

c) For deals over a certain size (and the thresholds are both increased from time to time as the state widens SINOSURE’s mandate, and are also to varying degrees relaxed depending on the strategic importance of the project to be financed), SINOSURE requires separate approval from the Ministry of Commerce (MOFCOM) and/or the State Council. These approvals can take a long time to be issued, however the SINOSURE underwriting department is capable of giving a qualified response (subject to such approvals) within three days of receiving a complete submission.

What might one expect as the debt/equity ratio?

80:20 is a typical debt: equity ratio, although typically on SINOSURE backed deals only the 15 per cent equity advance payment under the export content is documented.

In what currency will the loan be denominated? What is the base cost of funds?

Loans from Chinese institutions may be denominated in any currency. The vast majority of cross-border lending is in US$, based on a LIBOR base rate, however we have seen examples of Euro lending and expect to see more non-US$ financings as the Chinese institutions adapt to meet sponsor requirements.

C-EXIM direct funding to suppliers is typically tied to the currency of the relevant export contract (typically US$, though again there is flexibility).

In what currency will the supplier/contractor be paid?

As noted above, in cross border transactions, the supplier/contractor will typically be paid in the currency of the relevant supply/EPC contract (whether through commercial bank or C-EXIM funding). For domestic transactions, Renminbi may be used unless the relevant supplier/ contractor is a foreign entity requiring payment in foreign currency.

Is the supplier/contractor paid directly by the Chinese bank?

Typically Chinese bank funding will be made available direct to the supplier/contractor (following a drawdown request by the borrower), unless it is to be used to re-fund the borrower for payments already paid to the contractors/suppliers. Drawings require a supplier’s/ contractor’s disbursement request to support a borrower’s drawdown request.

Must all deals have a Chinese offtaker? If there is no Chinese offtaker what security is required? Do Chinese banks look for charges over payment accounts? In what instances might a parent company guarantee be required?

It is not strictly necessary to have a Chinese offtaker, although the state banks and ECAs require some form of Chinese component to the deal, whether this be a Chinese offtaker, equipment supplier or EPC contractor – see China content section below.

The security requirements of Chinese banks can be much softer than typical Western bank financing, however this tends to be the case where there is a strategic interest for China in the project and a public sector interest in the host country. However, where there are no such strategic interests and the Chinese lending arrangements are purely commercial funding terms then the Chinese bank/ECA will request full project finance style security. Chinese banks/ECA may also relax security requirements where there is a substantial parent company guarantee in place.

Is it traditional for Chinese banks to look for hedging of commodities?

Unlike typical international financing of mining projects, Chinese banks do not usually require any commodity hedging.

Is there a standard form of facility documentation? Is it LMA based?

There is no official standard form documentation which Chinese banks work to, however each bank tends to have its own standard form which is an LMA based form. The documentation is becoming ever more ‘Westernised’/LMA based, particularly on international syndicated transactions as China becomes more involved in international cross-border transactions. 

SINOSURE policies have become standardised – they have general terms and a schedule that sets out the specifics of the transaction that is covered – although some limited negotiation is possible.

International syndicated loans may be governed by English or other foreign law; however large bilateral deals tend to be documented under Chinese law (although still based on LMA style documentation). SINOSURE requires arbitration as the dispute resolution forum.

Are loans structured on the basis of a payment cascade as per international project finance?

Bilateral loans are structured on more simple corporate lending terms, particularly where there is a strategic interest for China in the project/host country. A parent company guarantee is typically required on this structure – there is no project finance style payment cascade and prescriptive controls over funds.

If the Chinese financing is purely a commercial transaction with no strategic interest, we have seen a move towards seeking more international project finance norms. We are also seeing Chinese banks lending on a bilateral basis on day one structure deals on more Western bank norms in order to be able to allow syndication if required – we are seeing a greater need/desire for syndication at present.

When Chinese banks fund as part of a wider Western bank syndicate they will expect to share in the full suite of project finance structures and security, including payment cascade and modelling mechanisms.

Will Chinese banks instruct their own technical adviser or is all technical due diligence done in-house?

The Chinese banks adopt more of a high-level approach to the technical due diligence. Typically the level of technical due diligence required by Chinese banks is more limited than that carried out by Western banks, and is done in-house rather than by appointing external advisers. Often the banks’ internal personnel will visit the relevant project asset/site and agree the commercial deal as the technical due diligence is carried out on-site.

Chinese banks will also often rely on borrowers' technical adviser reports, with or without specific reliance letters.

What Chinese approvals are required?

Other than internal authorisations (e.g. credit committee/board approval), MOFCOM and State Council approvals must be obtained to enable Chinese bank/ECA funds to be injected into projects (depending on the size of the facility) .

In relation to SINOSURE approvals, the process of getting a policy has become slower. Although obtaining an initial response on underwriting from SINOSURE can be relatively quick – within a week of SINOSURE receiving a complete file – the full process can get very bogged down as the underwriting request is processed through MOFCOM, and even more so if it has to go to the State Counsel. The process takes a minimum of three to six months to complete, and we have seen up to 18 months on a recent deal – despite rumours that the process is being streamlined, it appears to be getting slower.

The length and relative opacity of the process form the basis of negative comments about dealing with SINOSURE and Chinese banks.

What qualifies as ‘China content’?

The China content requirement is somewhat opaque, but looks to the outward level of goods/services originated in the PRC or otherwise eligible for SINOSURE cover or determined by SINOSURE: i.e. if the EPC Contractor is Chinese but subcontracts to a non-Chinese entity and/ or sources relevant equipment and supplies form outside China, this may breach the China content requirement. Ultimately sign off must be sought from SINOSURE up front, with the risk then to the Chinese bank and contractor going forward (i.e. no event of default under the loan agreement for breach of China content, and an obligation on the EPC Contractor in the EPC Contract to ensure compliance with China content).

EPC contracts with Chinese contractors

Chinese EPC contractors or Chinese equipment suppliers are often the borrower’s first introduction to Chinese sources of finance. The major advantage of a Chinese contractor is that not only will they be able to offer to provide a complete engineer procure construction package providing machinery and equipment (usually on economical terms) but also access to the funds to ensure that the project can be implemented. This has been a welcome relief to projects which found their project finance backers disappearing during and following the credit crunch.

Negotiating with Chinese EPC contractors and suppliers (usually SOEs) is a different experience to negotiating with a non-Chinese contractor. 

Chinese EPC contractors are becoming increasingly international in their outlook and we now encounter them working and soliciting for work throughout Africa, South America and even recently in Russia. This means that the Chinese EPC contractors are familiar with international forms of construction contract. Indeed, there is a generally held view that the FIDIC forms of contract, particularly the FIDIC EPC Contract (the Silver Book), are de facto acceptable for major construction and engineering work. However, the reality is that like their non-Chinese competitors, Chinese contractors will still require amendments to the standard risk allocation in the FIDIC form (and other international forms) of contract.

The normal international negotiating philosophy is that risk be placed with the party best placed to manage it. Although the Chinese EPC contractor will accept this philosophy, they also consider that a risk should stay with the party that has the most or best likely information in relation to that risk. So for example, the crucial ‘ground conditions’ risk is often rejected by Chinese contractors. However, with considered negotiation the Chinese EPC contractors will accept at least a share of this risk.

There are other key risk allocations where a borrower needs to take care that the fundamental risks in an EPC contract, such as the fitness for purpose design risk (which assures delivery of a working asset at a fixed price), are not eroded.

EPC contracts generally place a large degree of flexibility on the EPC contractor to source material and equipment. Given the ‘China content’ requirements of the Sinosure ECA cover, it is important that the risk of compliance with these requirements is placed firmly at the feet of the EPC contractor. Borrowers should consider the likely consequences of breaching the China content requirements under the finance agreements and how the EPC contractor can be made to pay losses to cover these consequences.

It is also important that the borrower remembers that during negotiations the Chinese lenders are unlikely to act in the same manner towards Chinese EPC contractors (particularly if they are an SOE) as a non-Chinese lender would. This is particularly the case if the borrower’s obligations under the funding agreements are backed by a parent. A borrower will need to consider all of the risks that it is taking under its financing agreements and ensure that it negotiates back to back protections with its EPC contractor. sovereign immunity issues should also be taken into consideration where the EPC contractor is an SOE.

A Chinese lender and Chinese EPC contractor/supplier structure can be turned to an advantage to the borrower if the underlying EPC contract or supply contract is dependant upon the loan being unconditionally available. The incentive to ensure that all conditions are satisfied becomes shared across the borrower, EPC contractor and lender.

As stated above, the PRC stated policy to encourage acquisitions in foreign assets can give rise to EPC contractors expressing an interest or requirement that it should be the offtake agent for the ultimate product from the mining project. Unless the offtake terms are highly advantageous this should be resisted as ultimately these terms could become the EPC contractor’s leverage if claims arise during construction.

Do the Chinese institutions offer project finance?

Every deal does have its own history. However, there are certain general themes:

  • in most cases the Chinese bank does expect recourse to the parent company
  • the test for most deals at parent are limited
  • don’t assume that the guarantee will fall away on construction completion
  • on-shore security is rarely asked for.

More recently, the following issues have emerged:

  • more reference to traditional project finance ratios – DSCR and LLCR
  • far more intense scrutiny of the financial strength of the parent support. This has led to requests for a suite of cashflow to debt tests and even restrictions of the operations of other material subsidiaries. In some cases this has caused the transaction to operate as a co-borrowing and thus make the terms of the transaction unattractive.

Resource M&A transactions involving Chinese investors

The surge in overseas investment by Chinese companies (both SOEs and, increasingly, private companies) looks set to continue in line with recent trends. In particular, SOEs in the oil and natural resources sector have accelerated their search for overseas investment opportunities to take advantage of depressed share and commodity prices around the world. This is in keeping with Chinese officials’ view that the deployment of foreign exchange reserves should focus on the natural resource sector in order to fuel China’s domestic growth. Non-Chinese mining companies will be aware of the current opportunity to raise money through Chinese investors and will need to consider some of the issues which they will be faced with when trying to secure PRC equity funding.

Due diligence

The prevalence of Chinese SOEs in the resources sector means that resource companies seeking to secure a Chinese investment should be prepared for a substantial due diligence process. Whereas the ready availability of cheap government finance, and the drive to secure resources, can mean that SOEs will be more willing to commit to the broad terms of the agreement at an early stage, they will almost certainly be obliged to present a comprehensive study of the investment to the Chinese governmental authorities when they seek approval for the investment and when they arrange their finance through Chinese banks.

Resource transactions are often complex in nature and will involve a broad range of legal issues, including local mining regulations. Therefore, in order to assist a potential investor in understanding the key features of the target’s business and the legal framework in which it operates, the target should anticipate the areas in which the potential investor is likely to be interested, and make initial preparations that will allow it to respond with the required information in a timely and rational manner.

Many SOEs will appoint investment banks and legal advisers to assist them with:

  • investment analysis and modelling issues
  • tax issues
  • structuring advice
  • project implementation and completion
  • due diligence.

Given the complexity of dealing with SOEs, these teams require significant diplomatic, legal, analytical and commercial skills to bring a transaction to a successful conclusion.

Preparatory due diligence issues

At the initial preparatory stage, the target should, in conjunction with its advisers:

  • prepare a comprehensive virtual data room
  • draft an introductory memorandum on the project and relevant documentation (including details regarding the history of the project/target and background/reputation of the management teams)
  • be prepared for significant Q&A
  • put in place a comprehensive confidentiality agreement and ensure all documents can be disclosed
  • prepare a summary of local applicable infrastructure and mining laws
  • have infrastructure and mining data and analysis ready for scrutiny.


One of the primary areas of concern for a potential investor, and an area in which it is unlikely to have prior knowledge, is in relation to the local infrastructure and mining regulations of the jurisdiction in which the target conducts its operations. Building a team of advisers who can distil the applicable regulations and present them in a clear manner will be important for satisfying the requirements of the potential investor. The most efficient way to do this is perhaps for the principal legal advisers to engage local lawyers and other technical advisers, while retaining oversight of the entire due diligence process. The advice will need to cover both mining codes and infrastructure concessions. This will ensure that the relevant local expertise is used and that it is harnessed and presented in a manner that will assist the potential investor in making its assessment of whether to invest in the target.

Case study – mining

Key issues for the local lawyers to address will include matters such as the precise ownership of the minerals, whether the state has a ‘free carried interest’ in the target, whether there are any restrictions on the sale of the minerals and what approvals are required for granting mining rights. In addition to those matters, the potential purchaser will also be concerned with the specific mining regulations which provide the detail of the procedures regulating the local mining sector, such as the licences involved, financing issues, registration systems and environmental laws. Legislation relating to surface rights, foreign investment codes, state corporations, company law, localisation/empowerment laws, employment law, competition law and planning law will also need to be analysed. There is clearly potential for a vast amount of legislation to be drawn into the due diligence process for a resource M&A transaction.

The experience of the target’s advisers is therefore invaluable as it will allow the most important areas to be anticipated so that information and responses can be provided as soon as practicable. The target will want to ensure that it does all that it can to progress the transaction as speedily as possible as the complexity of China’s legal environment (discussed below) often slows the pace of cross-border M&A transactions with Chinese companies.

An additional factor which can delay completion of the investment is the probable requirement of the key Chinese authorities that all of the conditions precedent to the investment being made, other than regulatory approval, are satisfied before they will even begin to seriously consider the investor’s application for approval. Further, there may well be special legislation or policies that govern investments by SOEs in the target’s own jurisdiction (eg, the Foreign Investment Review Board in Australia), so it is important for the target to ascertain the nature of the prospective investor at an early stage. These issues may well take time to resolve and must be considered in both the scope and timelines for the conditions precedent.

Mining projects are generally subject to a significant number of contractual and statutory requirements, including mining tenement conditions, farm in agreements, joint venture agreements and royalty agreements. On a mining transaction the most significant documents in due diligence will be the mining leases/licences. The forms of mining leases/licences will differ between jurisdictions – in some jurisdictions most of the provisions are set out in the law, while in others the ‘contract’ contains the bulk of the terms. In any event, the potential investor will need to be informed of certain matters such as the nature of the rights granted (whether this is a concession, a licence or some other right), what it entitles the holder to do, what its terms are and under what circumstances they may be terminated. Other agreements made by the target, such as management agreements, offtake agreements, refining agreements, contractor agreements, insurance and employment agreements will all be of significance to the potential investor. The ability of the target to have accurate information available immediately upon request and in an orderly fashion will again assist in the speed and success of the due diligence process.

It is clear that there is potential for the due diligence process to become a time-consuming matter for the target. One method of sharing the responsibility in this regard is to offer that legal opinions from the local law advisers be provided to the potential investor. This will mean that the matters covered by the opinions do not need to be addressed in due diligence. There will obviously be a limit on the range of issues which can be dealt with in this manner, however corporate issues such as the target’s valid incorporation, good standing and share capital history, as well as confirming the validity of the infrastructure and mining licences involved, may be dealt with by the legal opinions. This can be a useful tool in reducing the scope of the due diligence process and should be considered at the outset of the transaction.

The due diligence process will evidently be a significant issue for both the potential investor and the target. The potential investor, who in the context of the Chinese infrastructure and mining sectors will most likely be a SOE, will need to conduct a thorough due diligence process, and the target will want to ensure that it does all it can to provide a smooth and speedy process in which the potential investor is equipped with the information it needs to gain the necessary approvals and make an investment in the target company. However, beyond the due diligence process, there will be other factors relating to the nature of transacting with a Chinese counterparty in this sector that will be an issue to the target. The target will need to be prepared to address these factors in order to promote the success of the transaction.

Approval procedures for Chinese companies investing overseas

Virtually all overseas investments by Chinese enterprises will require government approval in China before they are able to be completed. The level and extent of those approvals is largely governed by the ‘level’ of the investor - if, as is often the case with significant investments in the resources sector, the investor is a SOE - and by the value of the investment. Further approvals may be required according to the particular circumstances of the investment. For example, an investment in a uranium mining company may need additional approvals from the Ministry of Science and Technology.

Often the key factor is not whether a particular investment will be approved, but rather how long that approval might take, and what conditions may be imposed upon the approval. The target company needs to be pro-active in understanding the impact of the Chinese approval regime on a prospective investment. There is nothing to be gained by relying on the investor or its advisers to include these approvals in the conditions precedent. Regardless of the contractual legal rights of the parties, the Chinese investor cannot, nor will it, proceed without all the necessary approvals.

China’s best known international enterprises - like Sinopec, Sinosteel, Baosteel, Minmetals, CNOOC etc - are all under the supervision of the State Assets Supervision and Administration Commission (SASAC). SASAC was established to hold the government’s interest in those enterprises and operates, in effect, in the manner of the majority shareholder in listed companies elsewhere. It does not generally interfere in the daily operations of the enterprise, nor make commercial decisions for them, but it does have the power to ‘hire and fire’ the enterprises’ senior executives, and it does monitor major investments. As a matter of prudence, we would usually include SASAC approval as a specific condition precedent in any significant investment by a major Chinese enterprise. Interestingly, the Chairman of SASAC, Li Rong Rong, recently described legal risk as the single most important challenge for Chinese enterprises investing overseas.

The approval of the National Development and Reform Commission (NDRC) is usually the determining factor in satisfying Chinese government requirements. If NDRC gives its approval, then the other Chinese authorities are likely to follow. Enterprises will usually lodge preliminary applications with NDRC, and will often engage in lengthy discussions with the enterprise, but as a rule NDRC will not make a final decision until all government and other approvals in the target’s jurisdiction have been granted. The target should factor in a delay of at least three months for NDRC approval.

MOFCOM approval is also usually required. Amendments to MOFCOM regulations in May 2009 have eased the burden of approvals somewhat, but it remains a necessary step in the case of most investments. 

MOFCOM is becoming increasingly interested in reviewing both inbound investment into China and outbound investment from China, particularly in the context of the recent changes to the anti-monopoly regime in China.

Finally, approval from the State Administration of Foreign Exchange (SAFE) will be required for the transmission of foreign currency funds out of China by the investor. This is usually the last step in the approval ‘chain’. There are no clear criteria for obtaining SAFE approval, although our experience is that if a full set of approvals has been obtained from NDRC, MOFCOM and SASAC then it is a straightforward process to obtain SAFE approval.

State Owned Enterprises

There is much ongoing debate as to the true nature of China’s SOEs. The enterprises themselves will often vigorously defend their autonomy from government. They will describe themselves as government owned, yet commercial, enterprises and there is no doubt that in our recent experience they are driven by normal commercial performance criteria. There is genuine, and occasionally fierce, competition between SOEs in China, and it is common for us to be expressly reminded that our obligation of professional confidentiality extends to non-disclosure to other SOEs, despite their common parentage.

SOEs do still face unique challenges when they try to invest in some foreign countries. Both CNOOC’s bid for Unocal in the US and Chalco’s bid for part of Rio Tinto in Australia/UK demonstrate that target companies need to be alive to the potential political issues that might impact on these investments, and be prepared to engage in the political process.

Occasionally, but not often, SOEs in both target and bidder countries will seek agreement from the target, as a condition of investing, that it will source goods or services from other Chinese enterprises. However, such requirements are more likely to arise in the context of project finance negotiations with Chinese state financial institutions, or where the ‘investor’ is a disclosed consortium of Chinese enterprises whose charters make readily apparent their intended respective roles.

If there are collateral conditions to the investment, they are more likely to relate to product off-take contracts. If a Chinese state owned steel mill is investing in an Australian iron ore project, it will be no surprise to the target if the investor requires guaranteed supply contracts. Indeed, the investor’s capacity to deliver a market for the target’s product is likely to be a significant motivating factor in the target’s consideration of the investment. Care will need to be taken that any approval required from any related party is obtained in those circumstances.

Despite the above observations, China’s SOEs are not typical international investors. Apart from the approval regime to which they are subject, SOEs are managed by a strictly hierarchical management structure which can be frustrating for target companies. Lines of authority are not always clear. The investor’s decision-making criteria may not always be clear nor necessarily motivated by profit alone. It may be subject to longer term goals than those which are apparent to the target. It is critical therefore that target companies familiarise themselves as much as possible with the prospective investor’s other business interests.

The formal signing of investment documents, whilst likely to be accompanied by much ceremony, is rarely seen by the Chinese investor as an end in itself. Rather, it is a milestone on an ongoing journey between the parties; a statement of the parties’ intention at the time. Experienced target companies will both expect, and prepare themselves for, renegotiations in the future. Further cultural nuances when doing business in China are discussed in the article below entitled ‘Observations on dealing with Chinese investors’.

Enforcement issues when dealing with Chinese counterparties

As in any transaction, the transaction documentation will need to contain appropriate governing law and dispute resolution provisions to ensure that obligations are enforceable in the event that a party refuses or fails to perform its side of the bargain. A contract with no means by which to enforce the obligations contained in it is little more than a dead letter.

In the vast majority of international transactions, this need for enforceability will (for reasons explained below) result in international arbitration, rather than litigation before national courts, being adopted as the final form of dispute resolution. Arbitration can be adopted either as the sole means of dispute resolution or as the final part of a stepped procedure by which (for instance) there is first to be (as a pre-condition to arbitration) an attempt at amicable settlement or a fast track form of dispute resolution (such as mediation).

This article looks briefly at points to bear in mind when choosing between dispute resolution options when contracting with a Chinese counterparty, and looks primarily at how (following the receipt of a favourable award in arbitration) enforcement proceedings may be taken against a Chinese counterparty. An understanding of the risks involved in enforcing international arbitration awards in China is an inherent part of understanding the risk profile of any infrastructure or mining deal involving a Chinese entity, be they a contractor, an offtaker or an investor.

Choice of jurisdiction/dispute resolution procedures

The starting point when considering these matters is the almost universal truth that a non-Chinese contracting party will not be willing to contemplate having to bring a claim in the Chinese courts. This might be for fear of bias among the courts in favour of Chinese entities (although this is not necessarily a fear validly held). More importantly, however, it will be borne from a desire to see a neutral form of dispute resolution adopted which does not inherently favour, in terms of culture, language or procedure, either contracting party.

In rare cases where a non-Chinese entity wishes to agree that Chinese litigation is the applicable forum, then of course any dispute will be resolved and decision enforced in accordance with the applicable rules of Chinese law. However, it is international arbitration, being a consensual process capable of being tailored to the parties’ desires, that fits the bill in virtually all other situations.

Arbitration – a summary

Although one can debate at great length the pros and cons of different methods of dispute resolution, when it comes to a process which is intended to give rise to a final and binding decision, the simple fact is that arbitration is the only truly viable option on an international basis. This is thanks to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). The New York Convention sets up a framework by which signatory states will recognise and enforce awards emanating from other countries (although many countries sign up subject to what is known as the reciprocity reservation, meaning that they will only enforce awards emanating from another signatory State). China has signed the New York Convention subject to the reciprocity reservation, meaning that it is bound under the terms of the New York Convention to recognise and enforce awards made in any of the 143 other signatory States.

The nationality of an award for New York Convention purposes is typically determined by the ‘seat’ (or legal place) of arbitration. This does not necessarily mean the location in which hearings are held. Indeed, the International Chamber of Commerce (ICC) Rules, for instance, make it expressly clear that tribunals are free to conduct hearings outside of the country of the seat. It follows that in drafting arbitration provisions in a contract with a Chinese counterparty, it is important to specify a seat of arbitration which is a New York Convention signatory state. This is not problematic in practice since all of the world’s major arbitration centres are (unsurprisingly) in signatory states.

The New York Convention is undoubtedly a major achievement in international relations and trade. To regard it as a guarantee that an award will always be enforced is, however, wrong. It sets up a framework pursuant to which countries are obliged, as a matter of international public law, to recognise and enforce awards. The New York Convention does not prescribe the process by which awards are to be enforced – all matters of procedure are left to be dealt with locally in the country of enforcement, but typically arbitral awards will need to be enforced by application to the relevant local courts. Questions such as what assets may be seized, how and within what time frame are accordingly local questions. Equally, it is up to local law to lay down the mechanism by which the successful party in arbitration is to apply to the local court to make an enforcement order. Needless to say, in some countries the process is significantly more complex, time consuming and costly than in others, and we set out below some of the key considerations in relation to enforcement in China.

A complete discussion of the issues which arise under the New York Convention would be voluminous. The key summary points to remember in relation to New York Convention are as follows:

  1. Not all countries of significance in the infrastructure and mining industries have signed it (see attached maps and link below to schedule of signatories).
  2. It sets up a framework for international enforcement but does not guarantee it. In particular:


    (a) The New York Convention permits states not to enforce awards in certain circumstances (see 3 below).
    (b) Some countries are more supportive of international arbitration (and so less interventionist at the enforcement stage) than others.
    (c) The New York Convention is interpreted locally and therefore differently from place to place.
    (d) All matters of procedure are left to local law (including the range of enforcement orders available and the timing of any court applications).


  3. Article V of the New York Convention permits a state to refuse enforcement where (in summary):


    (a) A party to the arbitration agreement was under an incapacity according to the law applicable to it.
    (b) The agreement to arbitrate is invalid according to the law to which the parties subjected it/the law of the place where the award is made (i.e. the seat of arbitration).
    (c) The party against whom the award is invoked was not given proper notice of the proceedings or of the appointment of the tribunal, or was otherwise unable to present its case.
    (d) The award contains decisions beyond the tribunal’s jurisdiction.
    (e) The tribunal was not constituted in accordance with the agreement of the parties/the law of the seat of arbitration.
    (f) The award is not yet final and binding or has been set aside by the court of the seat.
    (g) The subject matter of the arbitration is not arbitrable according to the law of the country of enforcement.
    (h) Recognising and enforcing the award would be contrary to ‘public policy’ in the country of enforcement.


As is apparent from the underlined sections above, certain significant matters fall to be determined according to the substantive law of the country in which enforcement takes place, even if that was not the law governing the contract or the dispute. Looking briefly at the position in China on these matters: exception (g) presents no practical difficulty nowadays as China’s Arbitration Law has enlarged the scope of arbitral subject matter to include contractual and property disputes; it also permits arbitration between legal and natural persons and organisations. However exception (h) does cause concern because its application is unclear. Rendered in China as social and public interest but lacking official definition, the exception appears to be broader than public policy. A commonly held view is that the courts will rarely allow the exception to be invoked.

Finally, it is important to note that, at least in the case of enforcing an award for damages, enforcement proceedings should be taken in any country(ies) where the unsuccessful party has assets against which the award may be enforced. Ideally, such assets would take the form of bank accounts or other liquid assets. If a Chinese counterparty has assets outside China, the enforcing party is free to (and may well choose to) take enforcement proceedings elsewhere than in China.

Enforcing arbitral awards in China

Assuming enforcement proceedings take place in China, there are some practical and legal points which need to be borne in mind.

In certain circles, China has traditionally been regarded as a ‘difficult’ country in which to achieve New York Convention enforcement. As China’s role in world trade grows, it becomes increasingly important to China that this perception does not persist. In 1995 the Supreme People’s Court (SPC) issued a notice which has gone some way towards addressing this perception. It requires courts to deal with applications for enforcement within two months from receipt and to refer draft decisions refusing enforcement first to the Higher People’s Court (HCR) and then to the SPC for review. The referral should be made within the same two month period. However, there is no set time for SPC rulings, which may not be issued for months or even years after the application is made. Although there is no right of appeal on review, and no right to appear before the HCR or SPC, the SPC may be amenable to informal discussion. The review system applies only to awards made by a foreign-related arbitration commission in China or a foreign arbitration institution. It does not apply to ad hoc awards, made in China or elsewhere, nor to domestic awards.

The time limit for an application for enforcement is two years reckoned from (and including) the final date for performance stated in the arbitral award.

It usually takes about two months to put together an enforcement application. Preparations should be put in hand while settlement negotiations are in progress, rather than waiting for them to end. Original documents are required to be filed with the court but a certified copy may be accepted if it is impossible or impractical to file the original documents. Care should be taken to check translations for accuracy before they are lodged as there is no opportunity to correct errors later. The documents required include:

  • duly authenticated original award
  • original agreement to arbitrate
  • Chinese translation of the award and the agreement to arbitrate, authenticated by a Chinese embassy or consulate or notarised by a Chinese notary public
  • written application for recognition and enforcement of the award (in Chinese), setting out the grounds and matters on which the application is based, the subject matter of enforcement and details of assets owned by the respondent
  • power of attorney in favour of the applicant’s lawyer (in Chinese)
  • proof of identity of the applicant (eg, certificate of incorporation, certificate of good standing or business licence) and certificate of identity of legal representative.

As discussed, for most foreign parties the preferred method of dispute resolution is international arbitration (i.e. arbitration with its place or seat outside China). Under Chinese law this choice is restricted to ‘foreign-related’ disputes. There are a number of factors to consider in determining whether a dispute is ‘foreign-related’. First, at least one of the parties should be foreign. No company incorporated in China, including a Chinese wholly owned subsidiary of a foreign company, will be regarded as ‘foreign’. Equally no company incorporated outside China, including companies registered in Hong Kong, Macau and Taiwan, will be considered Chinese. Second, a Chinese court will have regard to the subject matter of the transaction to determine whether it is foreign or domestic. Incidental cross-border elements are likely to be disregarded. The third case is where the legal facts that generate, alter or terminate rights and obligations between the parties occur outside China.

Alternative forms of international arbitration fall into the two broad categories – namely institutional and ad hoc. The more common institutional options are listed below:

  • ICC arbitration seated in Paris, Hong Kong or Singapore
  • LCIA (London Court of International Arbitration) arbitration seated in London, Hong Kong or Singapore
  • other venues for ICC and LCIA arbitration include Geneva and Zurich. The Stockholm Chamber of Commerce is also well known
  • HKIAC (Hong Kong International Arbitration Centre) arbitration in Hong Kong
  • SIAC (Singapore International Arbitration Centre) arbitration in Singapore.

To a greater or lesser extent each of these institutions administers arbitrations, has its own rules governing the appointment of arbitrators and the procedure in arbitration, and its own scale of fees, the HKIAC having the lowest fees of all.

Hong Kong and Singapore are the best arbitration venues in Asia. Each has sophisticated national arbitration laws and enjoys strong support from the local judiciary. The HKIAC and the SIAC tend to be preferred by parties to foreign-related agreements. In negotiations a Chinese party may begin by pressing for CIETAC (China International Economic and Trade Arbitration Commission) arbitration but eventually accept either HKIAC or SIAC as a satisfactory compromise. There are differences betweenHKIAC and SIAC in their approach to case administration and fee structures, and these differences should be considered before a choice is made.

A further alternative, and one that is often adopted, is ad hoc arbitration in Hong Kong or Singapore, sometimes subject to the UNCITRAL rules and with either the HKIAC or SIAC nominated as the appointing authority.

Ad hoc arbitration in China is problematic. It is generally thought that Chinese arbitration law requires all arbitrations in China to be conducted by a recognised Chinese arbitration commission. There are a large number of these commissions; CIETAC is probably the best known and most widely used. Foreign arbitration institutions such as the HKIAC, SIAC and ICC are not recognised arbitration commissions in China. There is a distinct possibility that the nomination of any foreign institution with a seat of arbitration in China would be treated as invalid by a Chinese court. However there should be no objection to ad hoc arbitration conducted outside China so far as enforcement inside China is concerned. In 2007 the SPC clarified its view of Hong Kong ad hoc arbitration by stating that these awards would be enforced in China in the same way as Hong Kong institutional awards. This statement may be taken as indicative of the way other foreign ad hoc awards are likely to be treated. Even so, there remains a drawback with foreign ad hoc awards in China in that the reporting and review system mentioned above applies only to the awards of foreign-related arbitration commissions in China or a foreign arbitration institution. In short, the safer route is to adopt institutional arbitration.

Arbitration inside China may be preferable to litigation inside China but is still compared unfavourably to arbitration outside China. There are several reasons for this. Taking CIETAC as an example, the appointment procedure is perceived to result in a preponderance of Chinese appointments; the selection of arbitrators is restricted to a panel unless otherwise agreed between the parties and approved by CIETAC; rates of remuneration are low causing preferred arbitrators to decline appointment; the ad valorem fee scale yields very substantial charges in high value disputes; and the application of ‘fairness’ and ‘equity’ in the arbitral process can lead to unpredictable results in the award. To an extent some of these points can be addressed by modifying the standard clauses used by arbitration commissions like CIETAC (e.g. by requiring the third arbitrator to be of a different nationality from either of the arbitrators appointed by the parties and by specifying English as the language of the arbitration, otherwise it will be Chinese). But there is nothing that can be done about the lack of power in tribunals to grant injunctions and evidence preservation orders. Parties are obliged to resort to the local courts for such relief and also for resolution of disputes over the jurisdiction of arbitration tribunals.

As a general rule foreign parties who are willing to agree arbitration inside China should insist on the nomination of CIETAC, or alternatively the Beijing Arbitration Commission, and make suitable modifications to the standard arbitration clauses.

Cross-border litigation does not benefit from any equivalent to the New York Convention. China has only a few bilateral agreements concerning the mutual recognition and enforcement of court judgments. One of the most recent arrangements has been between China and Hong Kong. This came into effect in August 2008. Its application is restricted by a number of conditions: for example, the parties should have agreed exclusive jurisdiction in the Chinese or Hong Kong courts and there are certain matters which are reserved to the jurisdiction of the Chinese courts. By comparison, the arrangement between China and Hong Kong for the recognition and enforcement of arbitral awards (February 2000), which reflects the New York Convention, is far less restrictive.

Coming back to the various methods of dispute resolution available, we have not entered into a detailed discussion of the pros and cons of mediation, expert determination, amicable settlement discussions, early neutral evaluation or any of the other numerous procedures which may be adopted by agreement in any given case. In China there is a discernible preference for mediation. There are several forms of mediation in use: institutional mediation; mediation under the auspices of an arbitration commission and court assisted conciliation. It is important to understand, however, that such forms of alternative dispute resolution frequently do not give rise to anything which purports to be a final and binding decision, and even where they do the New York Convention does not assist when it comes to enforcing the result, since it applies strictly to arbitral awards only.