Belt and Road Initiative

In 2015 the hottest topic in China's energy sector was not the domestic energy market reform; rather, the international arena garnered most of the spotlight, as the government unveiled the Belt and Road Initiative and commenced efforts to achieve greater international energy cooperation.

The Belt and Road Initiative — also known as the Silk Road Economic Belt and the 21st Century Maritime Silk Road — is a state initiative that was introduced by President XI Jinping during his visit to Central and Southeast Asian countries in September and October 2013. At the China-Association of Southeast Asian Nations (ASEAN) Expo 2013, Premier Li 1Ceqiang made a speech emphasising the need to build the Maritime Silk Road with ASEAN countries.(1) The announcement of this initiative has attracted much attention worldwide.

On March 28 2015 the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs and the Ministry of Commerce jointly released the Vision and Actions on Jointly Building the Silk Road Economic Belt and the 21st Century Maritime Silk Road. This document proposes that China fully leverage its strength in different regions of the country in order to advance the Belt and Road Initiative. It notes that good use should be made of both Xinjiang's geographic advantages and China's role as a window of Westward expansion into Asia in order to improve communication and cooperation with Central Asian, South Asian and Middle Eastern countries; this would make it a key centre for transportation, trade, logistics, culture, science and education, and a crucial point on the Silk Road Economic Belt.

It is also proposed that China maximise the advantages afforded by the Yangtze River Delta, the Pearl River Delta, the Western Taiwan Straits Economic Zone,(2) the Bohai Rim and other areas with a high degree of economic openness and strength, in order to facilitate further development of the Shanghai Pilot Free Trade Zone and support Fujian Province in becoming a core area of the 21st Century Maritime Silk Road. China should also use Qianhai (Shenzhen), Nansha (Guangzhou), Hengqin (Zhuhai) and Pingtan (Fujian) as liberalisation and cooperation zones, while also increasing cooperation with Hong Kong, Macau and Taiwan and building up the Guangdong-Hong Kong-Macau Bay Area.(3)

According to the relevant statistics and reports, the Belt and Road Initiative has achieved significant results in the early stages, providing strong impetus to Chinese outbound investment. In the first ir months of 2015, Chinese enterprises made direct investments in 49 countries that border Belt and Road routes, with the total investment amount reaching $14.01 billion — a 35.3% increase over 2014. During the same period, Chinese companies signed 2,998 new foreign-contracted construction project agreements in 6o countries bordering these routes, worth a total of $71.63 billion — representing a growth rate of11.2%.(4) The Belt and Road Initiative has already been regarded as China's highest national top-level strategy and the stakeholders (eg, the government, investors, financial institutions and banks, foreign companies and foreign governments and institutions) all expect more specific implementation projects to be implemented under the initiative.

Is China ready for the next wave of investment from the significant number of projects under the

initiative? In reality, the government has much more to do in order to pave the way for more investment along the routes of the Belt and Road Initiative. Moreover, such massive outbound investments need legal protection under various bilateral or multilateral treaties.

Energy Charter Treaty

Among the 65 countries bordering Belt and Road routes, 38 have signed bilateral investment treaties (BITs).(5) The other 27 are not yet covered by BITs or multilateral treaties to which China is party. In these countries, Chinese investment is potentially exposed to various political and legal risks (eg, expropriation and unfair or discriminative treatment), with no protection under international law.

One proposed solution to this problem is China joining the Energy Charter Treaty. This treaty, which entered into effect in April 1998 with 53 state signatories, advocates freedom in energy trade, transit, investment and efficiency. Its particularly robust legal protection provisions allow investors from one state to bring investment arbitration against a host state, thereby providing a remedy that is unavailable elsewhere. The treaty provides these protections on a reciprocal basis among member states and they are the same as those offered under any BIT between two member states.(6) China's accession to the treaty would undoubtedly benefit Chinese enterprises extending operations abroad under the Belt and Road Initiative.

Accession to the treaty would allow Chinese investors to enjoy the benefit of its provisions relating to national treatment and most favoured nation treatment; while Chinese outbound investment would be covered by multilateral, legally binding protection and would be subject to less discrimination or unfair treatment in host states. On the energy supply side, accession to the treaty could optimise China's energy import portfolios and expand overseas energy supply, thus ensuring the stability and abundance of the country's energy supply.

China has gradually come to recognise the importance of the Energy Charter Treaty in recent years, having cooperated closely with the Energy Charter by means of exchange visits and holding seminars and talks at other high-level engagements. In May 2015 Nur Bekri, the vice chairman of the NDRC and director of the Chinese National Energy Administration, led the Chinese delegation to the Energy Charter

Ministerial Meeting in The Hague, the Netherlands, where he signed the new International Energy Charter Declaration on behalf of the Chinese government. Pursuant to the declaration, China changed status from 'invited observer country1(7) to 'association' of the treaty, thereby taking an important step towards closer involvement in global energy governance.

All signatory states to the International Energy Charter Declaration will be invited to participate in the amendment of various treaty terms that were concluded at the 1994 European Energy Charter Congress, in hope of reaching a consensus on the new International Energy Charter Declaration.(8) This step is particularly significant for China, because it means that the country will become one of the rule makers in international energy governance by taking part in the treaty amendment process, rather than passively adapting to the amended treaty.

At present, the Chinese government, enterprises and academia have limited knowledge of the treaty's provisions, which has noticeably affected their willingness to accede to it. While investment arbitration under the treaty is a useful tool to protect Chinese outbound investors in the energy sector, it can also be a double-edged sword that would enable foreign investors to sue the Chinese government for possible violations under the treaty. The government is undertaking a series of legislative and policy reforms for the energy sector. These legal changes will likely affect inbound foreign investment projects in China, which will certainly increase the Chinese government's risk of being sued. Despite this, in weighing the benefits and the risks, joining the Energy Charter Treaty is still a rational choice. Doing so will provide stronger protection under international law for Chinese investment under the Belt and Road Initiative, while also encouraging domestic energy reform to comply with the treaty's requirements. Ultimately, this will benefit both Chinese investors extending operations abroad and foreign investors in China.