Borrowers’ State Immunity Concerns in Sovereign and Commercial Loans with Chinese Lenders under the China Foreign State Immunity Law


Borrowers’ State Immunity Concerns in Sovereign and Commercial Loans with Chinese Lenders under the China Foreign State Immunity Law

李治国 Edwin Li

1. Background

China moved away from the absolute immunity as argued in Democratic Republic of the Congo v. FG Hemisphere Associates (FG Hemisphere) [1] to restrictive immunity on the state/sovereign immunity from jurisdiction. The deviation is legalized by the Foreign State Immunity Law of the People’s Republic of China (“FSI Law”), adopted at the Fifth session of the Standing Committee of the 14th National People’s Congress (“NPC”) of the People’s Republic of China (“China”) and promulgated on September 1, 2023, which shall come into force as of January 1, 2024[2].

Many stipulations in the FSI Law refer to those in the United Nations Convention on Jurisdictional Immunities of States and Their Property[3] (2004, “UNCJIS”) which has not come into force since it has not reached the required thirty countries who deposited the instruments of ratification, acceptance, approval or accession with the Secretary-General of the United Nations. Although signed the UNCJIS in 2005, China has not gone through domestic approval procedure for ratification. After the enforcement of FSI Law, we can expect the ratification of UNCJIS may not take much time to go through the NPC approval procedure.

FSI Law is one of initial legislative trials by China in preparation for more sovereign debt restructures of emerging market and developing countries (EMDC) in coming years, which is reckoned as the side-effect of overexertion of Belt and Road Initiative (“BRI”) implementation.

2. Why does the FSI Law deserve attention?

Chinese financial institutions[4] (CFIs) as lenders, sovereign states, its governments and composing ministries of such governments, the state-owned enterprises and sovereign funds (“Borrowing Entities”) from EMDC as borrowers, ought to draw attention to FSI Law’s impact on their existing and coming sovereign and commercial loans (“Financial Transactions”). Many states in EMDC have been falling in a distressed sovereign debt situation since the Covid-19, which push them in the multilateral (such as Common Framework under G20) and/or bilateral negotiations with the official and private creditors for sovereign debt restructure[5]. Both CFIs and Borrowing Entities need to review the loan agreements in those Financial Transactions (“Financial Documents”) after the publishment of this FSI Law and before initiating the restructuring process, especially those clauses of governing law, dispute resolution and immunity waiver.

Compared to the Financial Documents signed by CFIs before 2010, the CFIs gradually abandon the English law and New York law as governing law instead of the law in mainland China (“China Law”) and prefer to selecting the arbitral institutions located in the mainland China to settle the disputes in the Financial Documents signed in the last decade. However, we still see the inconsistency between the two policy financial institutions in China, i.e., the Export-Import Bank of China (“CEXIM”) and China Development Bank (“CDB”).  CDB seems sticking to its international style in its Financial Documents all the time, which is not expected to last for long in the stressed global relationship.

If China Law governs the Financial Documents as CEXIM mostly did, the state immunity from jurisdiction and immunity from execution arise when the parties to the Financial Documents enter the arbitration phase. The new FSI Law will be a basis for the arbitral awards on those disputes submitted for arbitration after January 1, 2024, when state immunity from jurisdiction and/or execution will be invoked by any EMDC. Furthermore, FSI Law shall demonstrate a vital role if the prevailing party applies enforcement of the award by the people’s court in China (“China Court”). The courts in Hong Kong and Macau (“HKM Court”, together with China Court “the Courts”) will be bound by FSI Law since both have no power and authority on the foreign affairs related matters[6].

3. Scope of Immunity under FSI Law

a. General Principles

Unless otherwise stipulated, FSI Law allows the state immunity from jurisdiction on foreign states and their property as stipulated in Article 3. It implies that the foreign states’ property can enjoy the immunity from measures of constrains, pre-judgement or post-judgement, by the Courts, subject to the exceptions in FSI Law. Moreover, A foreign state’s consent to the jurisdiction of the Courts is not deemed a waiver of its immunity from judicial compulsory measures such as attachment, arrest and execution.

Although Borrowing Entities waived its state immunity from jurisdiction in most of the Financial Documents, it shall not be deemed a waiver of immunity from execution or measures of constraint by the Courts. If a waiver clause of immunity from execution is missing in the Financial Documents, CFIs may incorporate it thereinto by amendment. If such waiver clause has already been included in the Financial Documents, the Borrowing Entities need to engage legal advisor for review of such clause in the last quarter 2023 with purpose for being able to enjoy the state immunity under FSI Law to some extent.

b. Qualified State

There are two immunity subjects regulated by FSI Law, foreign state and their property. How to define the concept of a state for the purpose of immunity has always been the task for international investment and law scholars. Any of the following entities will be regarded as a state under FSI Law:

  • a foreign sovereign state;
  • a state organ or constituent unit of a foreign sovereign state; or
  • an organization or individual authorized by a foreign sovereign state to exercise sovereign authority and engaged in activities upon such authorization.

State-owned enterprises (“SOE”) is not mentioned in FSI Law. But SOE may still enjoy the state immunity if it has the authorization for its sovereign activities (not commercial activities).

It seems the Ministry of Foreign Affairs (“MFA”) has the final say on whether a country is qualified to be a state defined in FSI Law if the competent Courts are not able to so. We are opined that MFA will be rarely involved in such defining role.

c. Qualified State Property

As a basic principle, the immunity from execution will apply on the state property, among others, such as

  • property, including any bank account, used or to be used for the purpose of performing functions of diplomatic missions or its consular post, special mission, mission to an international organization, or delegation to an international conference.
  • property of the central bank or financial authority performing the functions of a central bank of the foreign state or a regional economic integration organization including cash, negotiable instruments, cash in bank, denominated securities, foreign exchange reserves, gold reserves, and the immovables and other property of the central bank or financial authority performing the functions of a central bank (“Central Bank Property”)[7];
  • other property which the Courts consider as not being used for a commercial activity.[8]

However, the above state property will not be granted the immunity from execution if 1) the state expressly consents to waive immunity from measures of constraint by an international treaty, a written agreement, submitting a written document to the Courts or any other means; 2) state has allocated or earmarked property for the execution; or 3) it is used for commercial purpose[9]. This will be more discussed in next section of this article.

In practice, China and foreign state may sign government to government agreement (“GoG“) which will be the basis for the Borrowing Entities to sign a series of sub-agreements on cooperation including Financial Documents (“Sub-agreements”). If Sub-agreements are governed by China Law, the dispute arising therefrom need a test of whether the Borrowing Entities are qualified as a state, whether their acts are commercial activities and for commercial purpose under FSI Law.

4. Exceptions to the Immunity under FSI Law

With respect to the Financial Transactions, there are few immunity exceptions, among others, may raise concerns from both CFIs and Borrowing Entities in the Financial Documents.

a. Commercial Activities Exception

FSI Law picks “commercial activities” rather than “commercial transactions” as used in UNCJIS for immunity exception purpose though the latter is more confined and precise.

The Borrowing Entities may not invoke the state immunity from jurisdiction in the proceedings arising from their commercial activities with an organization or individual of another state (including China) if such commercial activities took place in China or have direct effect in China territory even though they took place outside China.

Pursuant to the FSI Law, commercial activities refer to transactions of goods or services, investments, borrowing and lending, and other acts of a commercial nature, any of which does not constitute an exercise of sovereign authority[10]. As UNCJIS, the act’s nature and purpose will be taken into account by the Courts when determining whether an act constitutes a commercial activity. In the immunity waiver clause of most Financial Documents, the Borrowing Entities confirmed that the entrance into such documents constitutes a private and commercial activity. Such clause eases the Courts to claim its jurisdiction and should be redrafted if any of Financial Transactions is a performance of non-commercial activities.

The Borrowing Entities and their legal advisor shall strive to select a place where the Financial Documents are signed outside China territory if such documents are governed by China Law, though it may be challenging to prove there is no direct effect in China if those CFIs are parties to such document. In spite of this, the AB loan model between CFIs and multilateral development banks (“MDB“) might not have such direct effect to some extent.

b. Arbitration Exception

New York Convention and Washington Convention (“ICSID Convention”) are two key international laws to solve the disputes arising between a state and a private or commercial entity if the parties agree on arbitration. Awards under New Yor Convention need go through judicial review procedure for the recognition and enforcement in accordance with the law of the jurisdiction where the competent court enforcing the awards is located[11]. However, ICSID Convention stipulates that the awards shall be binding, recognized and enforced as if were a final judgment of a court in that contracting state without the judicial review procedure[12]. In connection with state immunity, the award under ICSID Convention is subject to the state immunity law in force in the contracting state[13].

CFIs and Borrowing Entities agreed in most of (if not all) the financial documents to submit their disputes on commercial activities to arbitration. In such cases, the Borrowing Entities shall not invoke the state immunity from jurisdiction of the competent Courts with respect to the following matters which require review by the Courts[14]:

  • the validity of the arbitration agreement.
  • recognition and enforcement of an arbitral award.
  • setting aside of an arbitral award.
  • other arbitration matters which are subject to examination by the Courts as provided by law[15].

“Other arbitration matters” are fully listed in Article 291 of the Civil Procedure Law of the People’s Republic of China (2023 Amendment) which was approved by same session of CPC when FSI Law was adopted. Therefore, the Borrowing Entities may lose the opportunities to challenge the arbitral award based on state immunity from jurisdiction if they agreed on arbitration in the Financial Documents.

For the sake of clarity, the review by the Courts on the “recognition and enforcement of an arbitral award” does not mean that foreign state consents to waive its immunity from execution on its property. If a China Court issues a ruling of confirming the recognition of an arbitral award, such award will be enforced in China pursuant to the relevant laws by the competent court. Neitherless, the enforcement will be subject to Article 15 of FSI Law and limited to, among other things, the state property that is located in the territory of China, used for commercial activities, and related to the litigation[16].

In the Financial Documents, the Borrowing Entities are required to open a bank account or escrow account in the CFIs in order for disbursement, repayment, transfer, settlement and other purposes. Such bank accounts will fall into the scope of enforcement ruling by China Court if the Borrowing Entities expressly waive the immunity from execution on their property, which are commonly seen in the Financial Documents, though partial fund in that account may have nothing to do with the disputed Financial Transactions.

5. Observations and Way Ahead

With China outbound investment and implementation of BRI, the Borrowing Entities increasingly seek financing from CFIs because of not only the cash-rich of those CFIs before 2019 but the lower interest rate since the beginning of 2023. However, the globally-spreading sovereign debt crisis in EMDC push China in the vortex of criticism for the brave loan expansion to those countries. On the other hand, the impact of hiking US dollars rate, high inflation, geopolitical conflicts and Covid-19 should not be ignored for this crisis. It should be noted that China government, the Ministry of Finance, the People’s Bank of China and CFIs have been contributing a lot in such sovereign debt restructuring while insisting on either no hair-cutting or hair-cutting together with MDBs.

While more and more Financial Documents with CFIs are governed by China Law, China seems very active to build up relevant legislation basis in case any of foreign state-related disputes, sovereign debt restructure or arbitral awards fall into jurisdiction of the Courts. In that case, the state immunity from jurisdiction and execution may be the first defense from the Borrowing Parties. That needs legal advisor of the Borrowing Parties to carefully draft the immunity waiver clause with precise qualifications.

Despite the above effort made by China, China has a huge gap to fill in for China Law to be recognized and adopted by the non-Chinese borrowers and lenders in their documents as governing law. While noticing this FSI Law in China, the EMDC’s global bond holders appear more concerned about the recent legislation development in the United States. As a US state whose law governs around half of global sovereign bond market, New York State lawmakers have three active Bills in relation to the sovereign debt restructure[17]in its senate. If passed into law, these Bills will significantly impact the global sovereign debt market and its restructure. With China’s rising shares in the bilateral debt of the EMDC and the increasing cost for those countries to raise fund in the global market, we note that some EMDC are in discussion about the issuance of Panda Bond in China. Although there is a long way to go for the EMDC to issue bond denominated in RMB under China Law, it will be definitely one option that China may propose and the issuing country may take into account in the future when the investor’s appetite arise.

From MDB perspective, there are two MDBs with their headquarters located in the territory of China, Asian Infrastructure Investment Bank (“AIIB”) and BRICS’ New Development Bank (“NDB”). It is reasonably believed that RMB Yuan will be more used as denominated currency and China Law may also be considered as a governing law option for the Financial Documents with the expansion of BRICS as shown by its summit in Africa in 2023 and the AIIB’s more involvement in the global financing market. We will see how the FSI Law will be implemented, applied, interpreted and enforced by the CFIs, Borrowing Entities, MDBs, judiciary organs, arbitral tribunals, financial advisors and private practice in the Financial Transactions.

The comments contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice.

You are welcome to connect with Edwin Li by  X: @EdwinZhiguoLI  orLinkedin:


[1] Democratic Republic of the Congo v. FG Hemisphere Associates [2011] HKCFA 41 [FG Hemisphere]

[2], the full text in simplified Chinese, last visit September 12, 2023

[3], last visit September 16, 2023

[4] Chinese financial institutions include those registered in the mainland China, Hongkong and Macau.

[5] This article will not touch and consider the application of FSI Law in undergoing sovereign debt restructure, multilaterally or bilaterally, but only focus on the implications of FSI Law on Financial Transactions.

[6] Interpretation of the Standing Committee of the National People’s Congress on Paragraph 1, Article 13 and Article 19 of the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China, Adopted at the 22nd Session of the Standing Committee of the 11th NPC on August 26, 2011

[7] In regards to Central Bank Property, the Law of the People’s Republic of China on Immunity of the Property of Foreign Central Banks form Compulsory Judicial Measures (adopted by NPC on October 25, 2005 and came into force the same day) granted the same immunity on those property. We can expect this law will be abolished in the near future after FSI Law takes effect in 2024.

[8] Article 15 of FSI Law.

[9] Article 14 of FSI Law.

[10] Article 7 of FSI Law.

[11] Article 5 of New York Convention.

[12] Article 53 and 54 of ICSID Convention.

[13] Article 55 of ICSID Convention.

[14] This will also apply to the dispute between a state and an investor if such state is contracting state of international conventions, such as ICSID Convention and bilateral treaties.

[15] Article 12 of FSI Law.

[16] Article 14 of FSI Law. The precise wording here should be “dispute” since “litigation” in Chinese language does not cover arbitration.

[17] Assembly Bill A2102A,Assembly Bill A2970 and Assembly Bill A5290.


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