Contracting with Chinese State-Owned Enterprises: Sovereign Immunity and Enforcement

The following is general information on Chinese law, not legal advice for any specific matter. The Foreign State Immunity Law is new and its application is still developing; the treatment of any claim depends on its facts. Consult qualified PRC counsel before acting.

Start with the distinction: an SOE is not the state

Most confusion in this area comes from conflating a state-owned enterprise with the state itself. Under the Civil Code and the Company Law, a Chinese SOE is a separate legal person: the state is a shareholder liable only to the extent of its capital contribution, and the SOE is sued directly as an ordinary defendant in a Chinese court. It has no sovereign immunity to assert, and the sovereign-immunity analysis simply does not attach to it. Sovereign immunity matters in a different setting — a claim against a foreign state or its organs — and that is the setting the new statute regulates.

The 2023 Foreign State Immunity Law

The PRC Law on Foreign State Immunity (中华人民共和国外国国家豁免法) was adopted on 1 September 2023 and took effect on 1 January 2024. It marks China's shift from the absolute-immunity practice it had long followed to a restrictive immunity doctrine with enumerated exceptions. The statute governs suits against foreign states in Chinese courts; it does not apply to claims against Chinese SOEs, which remain ordinary commercial claims against legal persons.

Who counts as a "foreign state", and the commercial-activity exception

Article 2 defines a foreign state to include the sovereign state itself, its state organs or constituent units, and organisations or individuals authorised to exercise sovereign authority. That last category is where the SOE question re-enters — a foreign SOE is treated as a foreign state only if it is authorised to exercise sovereign authority; an ordinary commercial foreign SOE is not, and enjoys no state immunity. Article 7 then sets out the commercial-activity exception: there is no jurisdictional immunity for proceedings arising from commercial activity with Chinese or other persons or organisations, where the activity occurred in China or occurred abroad with a direct effect in China. Commercial activity means transactions in goods or services, investment, lending and the like that are not an exercise of sovereign authority, and the courts weigh both the nature and the purpose of the activity. Related exceptions cover labour contracts (Article 8) and arbitration (Article 12).

Enforcement: a much higher bar

The gulf between getting jurisdiction and actually collecting is wide. Article 13 provides that foreign state property is immune from compulsory judicial measures, and — critically — that submission to the jurisdiction does not waive execution immunity. Article 14 then lists the three grounds on which execution immunity yields: an express waiver by treaty, written agreement or written submission to the court; property specifically earmarked or allocated for enforcement; or property located in China that is used for commercial activity and connected to the proceedings — a stricter "used for" standard than in some other jurisdictions. Article 15 adds categories that are never treated as commercial property and are therefore absolutely immune, including diplomatic and consular property, military property, and property of foreign central banks and monetary authorities (Article 15, paragraph 3), alongside cultural heritage, archives and exhibition items. The central-bank protection continues China's earlier 2005 statute on judicial compulsory-measure immunity for foreign central bank property.

What this means for a counterparty

• Suing a Chinese SOE is ordinary commercial litigation. No sovereign-immunity defence is available to it, and the state's assets are not on the table — only the SOE's own.
• Suing a foreign state in China is possible for commercial activity. But the Article 7 exception, and the nature-and-purpose test, have to be established on the facts.
• Enforcement against a foreign state is hard by design. Submission to jurisdiction is not a waiver of execution immunity, and central-bank property is categorically immune.
• Structure the counterparty correctly. Know whether you are dealing with a commercial SOE, a sovereign organ, or an entity authorised to exercise sovereign authority — the entire enforcement analysis turns on it.

The statute and its application are developing, and the treatment of any claim or enforcement measure depends on the facts; the summary above is general information current as of the date of writing. For the structuring and approval questions that arise when a foreign investor deals with a Chinese state-linked counterparty, see our guide to cross-border M&A in China: structuring and approvals, and for the enforcement mechanics once a judgment or award is in hand, see enforcing foreign court judgments in China.