Originally published in China’s Belt and Road Initiative (BRI) and Southeast Asia Publication, 30 October 2018.


Legal issues and implications of the BRI


China’s Belt and Road Initiative (BRI) celebrated its 5th birthday in September. First championed in 2013 by President Xi Jinping, the US$1tr BRI aims to chart new opportunities for international cooperation by building a trade and infrastructure network that connects Asia with Europe and Africa, reaching into more than 78 countries populated by 4.4 billion people and accounting for a third of world GDP.1

For the Association of Southeast Asian Nations (ASEAN), the BRI and the ASEAN Master Plan for Connectivity have major shared goals. Both envisage transport connectivity as a way of bringing countries closer together and improving access to trade, investment, and tourism. Given this shared vision, an excellent opportunity exists to find ways forward for mutual, if not equal benefit for both the BRI and ASEAN’s regional connectivity.2

But in a programme this large, disputes will be inevitable. How will they be settled? This is one of the many legal implications of the BRI programme. Of the 10 ASEAN countries’ legal systems, four are based on common laws, three on civil laws, and another three are hybrids of both common and civil law. Simply put, common law works on precedent that can date back centuries whereas civil law works on latest enactments only where, resulting from a juxtaposition of systems of more or less clearly defined fields of application, two or more systems apply cumulatively or interactively. China’s legal system is most similar to the hybrids. Inevitably, this represents a challenge to the ideal of ‘one legal framework’ to find single common ground. Nevertheless common ground can and must be found. There has already been an attempt by China to find a dispute resolution mechanism that is acceptable to all.

There are a large number and wide range of deals and contracts already in place between China and various ASEAN member countries. The example of railway concessions in Indonesia, Malaysia and Laos provides a useful illustration of the BRI’s legal issues.

BRI transactions

Based on select BRI railway concessions in Indonesia, Laos and Malaysia, legal issues and implications can best be identified in a comparison of BRI project documents:


Legal issues and implications

Based on select BRI railway concessions in Indonesia, Laos and Malaysia, legal issues and implications can best be identified in a comparison of BRI project documents:
The following legal issues and implications stand out from comparison of these three projects:

  1. ‘Onerous’ concession terms: While it is common for sponsors to provide legal terms in their favour, these rail concession agreements feature a range of lengthy tax concession periods, long term leases for Chinese companies and imports, plus exemptions from foreign worker quotas that in the longer terms are highly likely to raise issues with regard to the competitiveness of existing domestic industries.
  2. Conflicting priorities: The impact of a national government playing the dual role of commercial actor and regulator becomes problematic if the regulator role must take a back seat to the commercial actor, or vice versa. This can result in a bias towards large infrastructure projects that must be economically and environmentally significant. Allowing for ‘onerous’ concession terms will debilitate the government’s first task which is to govern a country’s resources such as by way of protecting the environment and the rights of its citizens. It is important then, in framing concession agreements, to be clear how much a government is relinquishing its traditional responsibility to its population.
  3. Financing terms: Appropriate financing arrangements are a vital element for each BRI project. Most of these can be expected to come from Chinese banks and financial institutions such as the Asian Infrastructure Investment Bank, the Silk Road Fund and the New Development Bank. China is going through a steep learning curve in financing BRI, for example in export credit insurance, cross-border international transactions, project finance models, and security law.9 It is not a surprise that deployment of funds creates issues because a lot must come together, notably a regulatory system that is able to work across borders, provide transparency, and put in place a balanced approach to address gaps between public and private lending.10 Part of the complications relate to the credit ratings of BRI countries; some do not have any rating at all. Funders, particularly China policy banks, might then be taking on debt based on under-performing assets, so adding to the issues of non-performing domestic loans already on their balance sheets.11
  4. Debt hangover: In addition to deployment issues, the BRI also raises the risk of debt distress–difficulty in maintaining repayment of loans–in some borrower countries. Eight out of the 68 countries that have been identified as potential BRI borrowers are at risk of debt distress based on the pipeline of project lending associated with BRI.12 Looking at BRI funding arrangements, it appears as if the recipient countries must bear the brunt of most of the financial risk whilst China benefits from both the financing and construction of infrastructure projects. For countries that plan to enter into BRI projects, while the economic prospects are tempting, the loan terms should be considered carefully and an in-depth due diligence must be conducted.13

    Laos: The 414km Laos railway project linking Vientiane to Boten (on the China-Laos border) has exacerbated Laos’ already precarious debt levels, which reached 68% of GDP in 2016. Concerns have been raised by the IMF that Laos, which lacks any railroads, is being led into a debt trap. Because China structures its loans on a case by case basis rather than following the “rules of the road” set out by the IMF or the World Bank, China could end up introducing “new debt vulnerabilities” in developing countries.14 Indonesia: Launched in January 2016, the 142km US$6bn Jakarta-Bandung railway is behind schedule. As of March 2018, only 10% of work has been completed. With only half of total land secured, cost escalation has already resulted in the price of the project increasing from US$5.5bn to US$6bn.

  5. Navigating different legal and regulatory systems: Given the difficulties in navigating different regulatory and legal systems such as common law (Singapore and Malaysia), continental law (Central Asia), and Islamic law (Middle East), it is inevitable that disputes and conflicts will arise. A solid legal foundation for the BRI therefore is important as clarity and legal certainty will be crucial components for BRI Projects to promote the flow of international capital.
  6. Dispute resolution: Recognising this, China has taken steps in the right direction. It established the Belt and Road International Commercial Disputes Resolution Mechanism and Institutions at the recent BRI Legal Cooperation Forum which concluded on 3 July 2018. Two new international commercial courts–in Shenzen, Guangdong Province and Xi’an, Shaanxi province15 will be established to settle and arbitrate cross-border commercial disputes. The establishment of these two international commercial courts will be an addition to the existing global legal framework and paves the way for rules to be harmonised.16
  7. Furthermore, on 1 October 2017 the International Investment Arbitration Rules of the China International Economic and Trade Arbitration Commission (CIETAC Investment Arbitration Rules or Rules) came into force. These will provide new clauses for new BRI contracts and treaties.17 But it remains to be seen how widely both the Rules, and CIETAC as an investor-state dispute resolution institution, will be accepted.18
  8. Project delays and compensation issues: Often, project delays are not attributable to market conditions but to internal in-country politics. Malaysia’s ECRL project for instance has recently been suspended on the grounds of “national interest”. If the project is terminated, the government will have to pay about RM22bn (US$5.4bn) in compensation and penalty charges.19

    While as the contractor CCCC is disappointed with the ECRL suspension order,20 Beijing is prepared to renegotiate the terms of the ECRL as it is a strategic project that will enable China to bypass Singapore when transporting its exports and imports from Port Klang to Kuantan Port and vice versa.21 This illustrates the tension between the geopolitical and commercial motivations of the BRI.


Big projects obviously require big thinking. The risk allocation between project host governments and China must be negotiated carefully, being mindful that obliging the local goverment to compensate the project for its losses is also a constraint on that government’s ability to protect the rights of its citizens and the environment.22

An alternative to China’s current debt-financing model could be one based on foreign direct investment. A more sustainable business is when shareholders take on venture risks and rewards. The success of the BRI will depend on all parties deploying, organising, and collaborating amongst themselves, locally and globally, rather than everything being centrally coordinated.

Finally, understanding and preparing for the legal challenges is important. Obtaining good advice and remaining astute to the latest legal and regulatory developments to ensure that projects have long-term sustainability is vital.23

1 CGTN, ‘5 years on, the Belt and Road Initiative’s contribution to Asian integration’, 23 March 2018. Date accessed: 20 July 2018.
2 Asia Times, ‘One Belt One Road: implications for ASEAN connectivity’, 12 December 2017. Date accessed: 6 July 2018.
3Free Malaysia Today, ‘China offers attractive financial deal for ECRL project’, 24 March 2017. Date accessed: 1 August 2018.
4 The Edge Markets, ‘MOF says Putrajaya yet to decide on ECRL’s fate’, 30 July 2018. Date accessed: 1 August 2018.
5 New Straits Times, ‘ECRL to spur one of country’s biggest listings?’, 3 November 2016. Date accessed: 1 August 2018.
6 The Edge Markets, ‘ECRL price tag of RM55b not as inflated – MRL Infra chief’, 5 October 2017. Date accessed: 1 August 2018.
7 New Straits Times, ‘ECRL fares will be affordable’, 28 November 2017. Date accessed: 1 August 2018.
8 The Star Online, ‘Major push to renegotiate deal’, 8 July 2018. Date accessed: 1 August 2018.
9 Clifford Chance, ‘China’s One Belt, One Road: Challenges and Opportunities – Thought Leadership’, 2017. Date accessed: 20 July 2018.
10 McKinsey & Company, ‘China’s One Belt, One Road: Will it reshape global trade?’, July 2016. Date accessed: 6 July 2018.
11 Deloitte, ‘Embracing the BRI ecosystem in 2018’, 12 February 2018. Date accessed: 31 July 2018.
12 John Hurley, Scott Morris, and Gailyn Portelance, ‘Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective’, March 2018. Date accessed: 20 July 2018.
13 Al Jazeera, ‘China’s Silk Road Project: A trap or an opportunity?’, 17 May 2017. Date accessed: 24 July 2018.
14 Asia Times, ‘Looming ‘debt risks’ threaten Belt and Road Countries’ 6 March 2018. Date accessed: 6 July 2018.
15 Global Times China, ‘China to set up international courts to settle Belt and Road disputes’, 28 June 2018. Date accessed: 11 July 2018.
16 The Straits Times, ‘Businesses tapping Belt and Road ‘will have recourse’’, 6 February 2018. Date accessed: 6 July 2018.
17 Kluwer Arbitration Blog, ‘The Structural Implications of Belt-and-Road Arbitration: China’s Legal Gamble across Eurasia’, 19 March 2018. Date accessed: 6 July 2018.
18 Herbert Smith Freehills, ‘Facilitating the Belt and Road: CIETAC launches Investment Arbitration Rules’, 4 December 2017. Date accessed: 6 July 2018.
19 The Malaysian Insight,‘RM22 billion to cancel ECRL’ 6 June 2018. Date accessed: 24 July 2018.
20 The Star Online, ‘CCCC is disappointed with ECRL suspension order’, 4 July 2018. Date accessed: 9 July 2018.
21 The Star Online, ‘Dr M jolts China’s Belt-Road plan’, 3 June 2018. Date accessed: 6 July 2018.
22 Human Rights Centre, Essex University, ‘An Analysis for Mekong Watch’, 30 May 2005.
23 Baker and McKenzie, ‘Belt and Road: Opportunity & Risk – The prospects and perils of building China’s New Silk Road’, 2017. Date accessed: 20 July 2018.

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About Hanim Hamzah


Hanim Hamzah is Regional Managing Partner of ZICOlaw Network, the only premier law firm network with offices in all ten ASEAN countries. The network comprises independent leading law firms with a full presence in 18 cities across Southeast Asia, a region of over 600 million people and 10 countries. Research support by team led by Norlaila binti Mohd Nasir of ZICO Knowledge Services Sdn Bhd. She is also Senior Fellow of the CIMB ASEAN Research Institute.