Research On The Prudential Carve-out In Sino-Foreign Investment Agreements

There is an inherent tension between the liberalization of financial services and financial regulation.As China’s financial industry opens up and develops in depth and breadth,on the one hand,the liberalization of financial services should be promoted and a good investment environment should be created;on the other hand,the host country’s domestic financial regulatory sovereignty should be paid attention to safeguarding.Especially with the outbreak of the two global financial crises,maintaining security in the financial sector has attracted increasing attention in recent international investment agreement contracting practices,the prudential carve-out has been clearly stipulated in numerous international investment agreements,and their legislative purpose of them is to promote the opening of financial services and defend right to regulate.The prudential carve-out in China’s international investment agreements has different models.The vague wording of the prudential carve-out needs further clarification.This paper conducts an analysis based on the provisions in IIAs,combined with the relevant case of the financial prudential exception.Finally,it focuses on the related provisions of China’s IIAs,and tries to make recommendations for improvement.The first part analyzes the origin background of the prudential carve-out and further analyzes the necessity of clearly stipulating this clause in international investment agreements.Due to its strict requirement of the essential security clauses and customary international law,it is difficult for the host country to defend effectively in the practice of investment arbitration,which is not conducive to maintaining the sovereignty of financial regulation.To further clarify,the starting point of the analysis of the prudential carve-out should be the correct distinction between the concepts of "prudential measures" and "measures for prudential reasons".The second part analyzes the substantive rules of the prudential carve-out.Based on current international investment agreements,combined with relevant cases,it analyzes the understanding and application of substantive rules.The prudential carve-out covers positive conditions and negative conditions.The positive conditions of this clause requires that the purpose is justified and measures are taken for prudential reasons;there needs to be a direct cause-and-effect relationship between the measure and the purpose;the negative conditions of this clause are mainly aimed at restricting the abuse of the prudential carve-out,if it constitutes an abuse of the prudential carve-out,the clause cannot be invoked as a valid defense.The third part analyzes the procedural rules of the prudential carve-out based on the current international investment agreements,and conducts a further analysis on the necessity of stipulating special provisions on the procedural rules,and summarizes the main features of the special procedures.It is mainly reflected in the restriction of the jurisdiction of investor-state disputes arbitration tribunal,the provision of special pre-consultation procedures for the prudential carve-out,the limitation of the arbitrator qualification,and the provision of non-disputing parties’participation in investment arbitrations.The fourth part clarifies the issues related to the prudential carve-out.The first question mainly analyzes whether the prudential carve-out should be set as self-judging clauses.The specific arrangement based on the prudential carve-out does not need to be specially set up as self-judging clauses.The second question mainly analyzes the relationship between the prudential carve-out and capital transfer clauses.It also further clarifies that the international balance of payments exception and the carve-out cannot be substituted for each other,and should be clearly stipulated separately.The fifth part focuses on the main problems existing in China’s investment agreements,and through the analysis of the problems,further suggestions for improvement are put forward.The prudential carve-out has different models in China’s investment agreements,which are not conducive to expanding its influence on the formulation of international investment rules.China should unify the provisions of the prudential carve-out,improve the provisions to prevent abuse of the prudential carve-out,make special provisions on procedural rules,protect the host country’s financial regulatory sovereignty,and formulate a Chinese model.