Market Access Report: Construction

October 31, 2002 | BY

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China's US$400 billion construction industry already accounts for nearly 7% of the country's GDP, and anyone who has visited China in recent years will…

China's US$400 billion construction industry already accounts for nearly 7% of the country's GDP, and anyone who has visited China in recent years will not be surprised to learn that it is the world's fastest growing construction market. China is the building site for countless new residential and commercial buildings, gleaming industrial parks, record-breaking public infrastructure projects, and is expected to soon be home to the world's tallest building. The country will build 10-35 million housing units annually over the next ten years (compared to less than two million annually in the US), and increase the average per capita urban living area from 13.6 to 23 square metres within the next five. Infrastructure improvement is a key priority in the 10th Five-Year Plan (2001-2005), with up to US$400 billion being set aside for roads, railways, harbours, airports and power stations. In addition, US$25 billion worth of construction projects is slated for the 2008 Beijing Olympic Games.

But foreign contractors' involvement in this market has been limited. China agreed in its Protocol of Accession to the WTO (Protocol) to gradually eliminate a number of existing restrictions on foreign investment in the construction sector, with perhaps the most notable commitment being the elimination of the prohibition on wholly foreign-owned enterprise (WFOE) construction companies by December 11 2004. The central government brought forward several measures when it promulgated the Administrative Regulations on Foreign Invested Construction Companies (Construction FIE Regulations). These regulations have lifted a number of restrictions earlier than its WTO commitment schedule, such as permitting WFOE construction companies from December 1 2002, a full two years ahead of China's Protocol commitment.

Pursuant to the 1998 PRC Construction Law, companies that engage in construction activities are generally divided into four categories: construction companies; design companies; surveying companies; and construction management companies. Contractors and construction professionals are subject to registration, licensing and tiered grading systems.

Construction and Related Engineering Services

Until recently, international construction companies were only permitted access to China's market through Sino-foreign joint ventures (JVs), or by obtaining a Qualification Certificate from the Ministry of Construction (MOC) or provincial-level authorities on a project-by-project basis. The Construction FIE Regulations eliminate the latter as of October 1 2003, but allow international construction companies to establish WFOEs from December 1 2002.

The Construction FIE Regulations eliminate the higher registered capital requirements imposed on JV construction companies, again two years ahead of the WTO schedule. Nevertheless, the Construction FIE Regulations cap foreign equity ownership of JV construction companies at 75%, although neither the pre-existing legal regime nor China's WTO commitments contain such limitations.

As allowed by the Protocol, the Construction FIE Regulations provide that WFOE construction companies are only permitted to undertake construction projects that are:

• wholly financed by foreign investment and / or grants;

• financed by loans of international financial institutions and awarded through international tendering;

• jointly constructed with at least 50% foreign investment; or if the foreign investment is less than 50%, the construction project is technically difficult to be implemented by Chinese construction enterprises alone; and

• Chinese-invested construction projects that are difficult to be implemented by Chinese construction enterprises alone can be jointly undertaken by Chinese and foreign construction enterprises with provincial government approval.

Construction Design Services

International design companies are currently only permitted to enter the domestic Chinese market through a JV, although in practice many international design companies do work from overseas and sell their design work product to Chinese clients. As part of its WTO commitments, China agreed that WFOE design companies will be permitted prior to December 11 2006, and the recently promulgated Administrative Regulations on Foreign Invested Construction Design Companies (Design FIE Regulations) specifically permit WFOE design companies although the date on which the MOC and the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) will actually begin approving such WFOEs has not yet been announced.

Similar to the investment restriction imposed on JV construction companies, foreign equity ownership of JV design companies is also capped at 75%. Although no specific restriction on the permitted scope of activities for foreign-invested design companies is set forth under the Design FIE Regulations, WFOE design companies are subject to more onerous technical personnel registration requirements.

Surveying and Construction Management

Foreign surveying companies are as a practical matter required to establish a JV design company and then obtain a specific Qualification Certificate for Surveyors in order to conduct formal surveying work in China. For construction management services, foreign investors are currently only allowed to establish JVs, although in practice, some WFOEs and foreign construction management companies do operate in China through construction and engineering consulting arrangements.

Conclusion

Although international construction companies now have more options available to establish operations in China as a result of China's accession to the WTO, the market is not yet fully opened to foreign investors. That being said, a rapidly industrializing economy, growing urbanization, intensive infrastructure development, and high economic growth rates should continue to attract foreign construction companies for many years to come.

By Mitch Dudek
Ashley Howlett and Angela Jin

Jones, Day, Reavis & Pogue,
Shanghai and Hong Kong

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