Market Access Report: Construction

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