CRANES EVERYWHERE Construction equipment is a common sight in Beijing. Consultants forecast growth of 8.5% a year until 2007.

New regulations going into effect in China are changing the way that international designers and contractors do business there. China’s entry into the World Trade Organization requires opening its construction market to foreign participation. For the first time, the regulations allow wholly owned foreign enterprises in the country’s construction industry. But the new rules are also likely to end the ability to work in the country on a project by project basis.

"Permission to set up wholly owned foreign firms will provide a good opportunity for long-term development," said Diao Chunhe, vice chairman of the China International Contractor’s Association. Diao spoke at the Global Construction Conference in Washington, D.C., Dec. 9, sponsored by the Associated General Contractors and McGraw-Hill Construction, ENR’s parent.

China was the third-largest market in the world in 2002, with $404 billion in construction, according to market research firm Global Insight. "We estimate growth at 8.5% a year between 2002 and 2007," said Toronto-based director Chris Holling.

Diao added that the new rules allow joint ventures between foreign and local partners and allow foreign firms to have a majority ownership. But wholly foreign-owned construction enterprises are limited to contracts on projects that are fully funded by foreign investors, funded by international financial institutions with contracts awarded by competitive bidding, or projects where foreign investment is 50% or more of total cost. Projects that are "technically difficult" for Chinese firms or that they cannot "execute independently" may also be awarded to such ventures.

DIAO

Diao said CHINCA can help international firms find joint venture partners in China, and he said the group is considering accepting foreign contractor members in an international division.

After April 1, 2004, however, foreign contractors will not be able to work in China "by applying for approval on a project to project basis," according to a white paper on the new regulations by Hew Kian Heong, a partner in the Shanghai office of construction law specialist Masons Thelen Reid LLP. Contractors will have to work through a Chinese corporate entity.

Richard F. Brose, in the Newark, Del., office of BE&K, said he has worked on a number of chemical plant projects in China through a Kvaerner/BE&K joint venture, where they take "project responsibility with the client" but would "prefer not to set up a company in China."

Implementation measures for the design firm regulations have not yet been issued, but draft measures include a provision requiring 25% of the professional staff of a wholly foreign-owned design enterprise to be foreign service providers who are registered architects or engineers in China. This requirement will be difficult for any foreign firm to satisfy, said Hew. "It will be interesting to see if foreign designers can remain competitive on fees if they have to maintain a large number of expatriate staff," he said.

LEVINE

Henry A. Levine, deputy assistant secretary of commerce for Asia and the Pacific, said China offers enormous business opportunities and enormous challenges and problems. "Beware of anyone who emphasizes only one side of the coin," he said. Challenges include "ex-cessive regulations, lack of transparency (even Chinese companies have a hard time finding out what regulations apply), theft of intellectual property rights and a business system that runs on personal relationships" rather than on the rule of law.

(Photos by Janice L. Tuchman for ENR)