China: Construction: How will China’s Accession to the WTO Affect the Construction Industry in China – Opportunities for Foreign Companies

China has posed a dilemma for business for years. The market has been too large to ignore, but frustratingly difficult to enter and navigate. Lack of transparency, closed sectors, and rules designed to keep foreigners out of many lucrative but underdeveloped business activities have dogged foreign investors since China announced the opening of its economy in 1979. China’s WTO Accession will rationalize China’s business environment in a number of ways, a few of which are discussed below.

Entering the Market

Establishing a company in China has been a challenge for foreign investors on two fronts. First, many industries have been closed (or semi-closed) to foreign investment, especially in the service sector. This should improve, as China has committed to open more industries following WTO accession. Second, the foreign trade regime itself has been a barrier. It has been difficult for foreign investors to get information on, or participate directly in, the approval process. This should become easier. Upon accession, China must have in place a mechanism by which individuals and companies can bring problems with discriminatory application of the foreign trade regime or with enforcement of China’s WTO commitments to the attention of the central government, which then must refer the matter to the appropriate authorities.

Access to Information

Not all of China’s laws and policies are publicly available, which has made it difficult for foreign investors to structure their projects. Under the WTO, China has undertaken to address this problem by publishing information, including all legislation, information on review of administrative actions, lists of entities responsible for approval of imports and exports, notices on technical regulations and standards, a list of government authorities responsible for approving or regulating services sectors, and investment licensing procedures and conditions. China must provide additional information to the WTO or to committees under the WTO on a regular basis pursuant to a transitional review mechanism.

In addition, China has undertaken to set up one or more inquiry points where any individual, entity or WTO member country can obtain information on laws or regulations relating to foreign trade or investment and contact details for government departments responsible for implementing such laws or regulations.

This increased transparency will make it easier for foreign investors to do business in China, and will help ensure that China implements its WTO obligations.

Foreign Participation in China’s Construction Sector – Pre WTO

Prior to China’s entry into the WTO, international construction companies were only permitted market access to China via two paths:

• In the form of joint ventures with Chinese companies.
• By obtaining Qualification Certificates from local provincial Committees of Construction or the Ministry of Construction.

Various limitations existed in respect of minimum registered capital requirements for sino-foreign joint ventures. The Provisions on Establishment of Foreign-invested Construction Enterprises (Reg. No. 533 1995) provided that for Grade A contractors, the minimum registered capital requirements were US$10 million; Grade B contractors were required to have a minimum registered capital of US$5 million; and for Grade C contractors, the minimum was US$1.6 million.

Foreign Participation in China’s Construction Sector – Post WTO

According to the WTO Working Party Schedule of Specific Commitments, within three years of China’s accession to the WTO, wholly foreign-owned enterprises ("WFOE") will be permitted direct access to China's construction market.

Accordingly on September 27, 2002, the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") and the Ministry of Construction ("MOC") issued Order Nos. 113 and 114. These orders became effective on December 1, 2002 and contain the regulatory requirements for Foreign Invested Construction Enterprises ("FICE") and Foreign Invested Building, Engineering and Design Enterprises respectively. Order 113 deals with construction enterprises, and Order 114 deals with design enterprises. In the commentary that follows, we will concentrate on Order 113.

MOFTEC and MOC Order 113

As we have mentioned above, Order 113 relates to FICEs, which are defined by Article 2 of Order 113 as any one of:

• Construction WFOEs.
• Sino-foreign equity construction joint ventures.
• Sino-foreign cooperative construction enterprises.

A foreign investor who intends to establish a FICE must obtain a foreign investment enterprise approval certificate from the relevant foreign trade and economic cooperation administration department and register with the State Administration of Industry and Commerce or the relevant local industry and commerce administration department authorized by the State Administration of Industry and Commerce. It must also obtain a qualification certificate from the relevant construction administration department (Article 3).

Certain procedures have been set up to enable foreign investors to apply to establish FICEs, and a grading and categorization system has been established to administer the examination and approval of applications for the establishment of FICEs and the qualifications of FICEs (Article 6).

There is a five-stage procedure set out in Article 7 for the application for a construction contractor with Super Grade or Grade A qualification or a specialized contractor with Grade A qualification, as follows:

1. The applicant must submit an application to the foreign trade and economic cooperation administration department of the people’s government of the province, autonomous region, or directly administered municipality where the proposed FICE is to be established.
2. The foreign trade and economic cooperation administration department of the people’s government of the province, autonomous region, or directly administered municipality is required to complete a preliminary examination within 30 days of receiving the application. If it grants the preliminary approval, it must submit the application to the foreign trade and economic cooperation administration department of the State Council for further approval.
3. Within 10 days of receiving the application for further approval, the foreign trade and economic cooperation administration department of the State Council must forward the application to the construction administration department of the State Council for review and comments. The construction administration department of the State Council has 30 days to provide its opinions in writing. Within 30 days of receiving the response, the foreign trade and economic cooperation administration department of the State Council must give its approval or refusal in writing. If approved, the applicant is issued with a foreign-invested enterprise certificate.
4. Within 30 days of receiving the approval certificate, the applicant must register the FICE with the relevant registration department.
5. After obtaining the business licence for the legal entity, the FICE must apply for a qualification approval in accordance with the Regulations on Administration of Construction Enterprise Qualifications.

All in all it should take no more than 100 days to register a FICE.

In relation to FICEs that take the form of joint ventures, the total capital contribution of the Chinese party must be not less than 25 percent of the registered capital (Article 12).

Article 15 provides that FICEs that take the form of WFOEs will only be permitted to undertake the following four types of construction projects within the scope of their qualifications:

• Construction projects wholly funded by foreign investment, foreign grants, or foreign investments and foreign grants.
• Construction projects financed by loans from international financial institutions and awarded through international tendering process according to the terms of the loans.
• Sino-foreign jointly constructed projects where the foreign investment is equal to or more than 50 percent; and sino-foreign jointly constructed projects with foreign investment less than 50 percent but technically difficult to implement by Chinese construction enterprises alone and a special approval is obtained from the construction administration department of the people’s government of the province, autonomous region, or directly administered municipality.
• Chinese-invested construction projects that are technically difficult to implement by Chinese construction enterprises alone can be jointly undertaken by Chinese and foreign construction enterprises with the approval of the construction administration department of the people’s government of the province, autonomous region, or directly administered municipality.

FICEs in the form of joint ventures are permitted to undertake constructions projects within the permitted scope of their grades of qualifications (Article 16).

In addition, as is provided for in the Construction Law, where a FICE undertakes a construction project as the contractor, it must itself complete the main structure of the project (Article 18).

Finally, the establishment of FICEs by investors from Hong Kong SAR, Macao SAR, and Taiwan are required to be carried out in accordance with Order 113, unless any laws or regulations or State Council provisions provide otherwise (Article 23).

Qualifications

Under Order 113, once a FICE has been registered and obtained Chinese enterprise legal person status, it is then necessary to apply for a construction enterprise skill certificate (Order 113 Qualification Certificate).

Order 113 Qualification Certificates are granted under the Regulations on Administration of Construction Enterprises Qualifications ("Regulations") and the Qualification Grading Standards of Construction Enterprises ("Qualification Grading Standards"). According to Article 6 of the Regulations, the qualifications of construction enterprises are managed by a grading and categorization system established by the construction administration department and other relevant departments of the State Council. Under the Qualification Grading Standards, construction enterprises are classified into contractors, specialized contractors, and subcontractors. Contractors are further divided into 12 qualification categories with four grades — Super Grade and Grades A, B, and C, while specialized contractors are further divided into 60 qualification categories with two to three grades. Subcontractors are further divided into 13 qualification categories with one to two grades.

The table below summarizes the minimum registered capital requirements for the respective qualification categories and grades for contractors:

Super Grade contractors can undertake all types of building, highway, railway, etc. projects. In general, Grades A, B, and C contractors can only undertake works up to a value of five times their registered capital³. In addition, there are various other restrictions for Grades A, B, and C contractors, for example, in relation to building works, Grade A contractors can construct buildings no higher than 40 storeys or 240 metres; Grade B contractors can construct buildings no higher than 28 storeys or 120 metres; and Grade C contractors can construct buildings no higher than 14 storeys or 70 metres.

On April 8, 2003, the MOC issued implementation rules for a transition period between December 1, 2002 and October 1, 2003, when the current Tentative Measures on Administration of Foreign Enterprise Qualifications for Contracting for Construction Projects in China (Order 32) expire. During this period, foreign enterprises can apply for skill qualification certificates under the "old" Order 32 regime and/or under the "new" Order 113 procedure. After October 1, 2003, only applications for Order 113 Qualification Certificates will be processed.