Firm blames Beijing for its losses

A midsize Korean builder has brought a claim for damages against the Chinese government at the World Bank arbitration tribunal, the first investor-state dispute (ISD) case involving a Korean company and the People’s Republic of China.

According to an application acquired by the JoongAng Ilbo yesterday, a Korean construction company known by the name Ansung Housing filed for arbitration at the Washington, D.C.-based International Centre for Settlement of Investment Disputes (ICSID). The arbitration began last week after the institution accepted the application.

Chinese President Xi Jinping is named in Ansung’s complaint, the application shows.

Ansung had Bae, Kim & Lee, one of Korea’s top five law firms, send letters requesting discussion of the matter to the Chinese government twice. China didn’t respond and the company filed the claim.

The dispute dates back to 2006, when officials from China’s Jiangsu province hosted an event in Seoul to attract foreign investors. Ansung’s expertise ranged from apartment and golf course construction to sales of completed products. Its CEO was lured to the idea of building a golf course in the eastern Chinese province. He later visited the region several times to research the feasibility.

Sheyang County in Jiangsu province allegedly promised that it would provide sufficient land for a 27-hole golf course and would not issue an approval to other bidders so that Ansung’s would be the only golf course in the county.

The CEO then made a bold investment of $15 million in the project.

The attitude of the county government changed abruptly as soon as construction began. The plot of land provided was so small that Ansung had to reduce the scale of the golf course to 18 holes, and it could not build the condominiums it had planned to sell. The government allegedly overlooked a Chinese company building and operating an illegal golf course in the county.

Memberships for Ansung’s golf course did not sell well, which allegedly forced it to sell the pricey development to a Chinese company for a mere $1.2 million - less than 10 percent of its total investment - and withdraw from China.

The loss from the investment amounted to $14 million, Ansung says.

The litigation, the first of its kind between a Korean company and the Chinese government, has paved the way for more Korean companies that ambitiously enter China but later lose out after either the central or local Chinese governments abruptly change their rules.

The Korea-China bilateral investment treaties (BIT) clinched in 2007 stipulates that the Chinese government should protect Korean investors’ investment and sales operations. But that doesn’t always, or even often, happen.

Korean companies tend to consider government flip-flops or betrayals part of the unique risk of doing business in China. The Ansung case suggests patience is wearing thin with that ground rule.

“The chance of Ansung receiving counter indemnity through the arbitration is high, given the process has kicked off already,” said Kim Kap-you, a lawyer at Bae, Kim & Lee who represents the case.

According to statistics by the Ministry of Knowledge Economy, Korean companies with operations in China currently total 3,575.

BY JO KANG-SU, SEO JI-EUN [spring@joongang.co.kr]