«The Construction Sector in China Report: The Construction Sector in China The Construction Sector in China China’s economy is in the midst of ...»
The Construction Sector in China
Report: The Construction Sector in China
The Construction Sector
China’s economy is in the midst of structural change. Sustainability and quality are the cornerstones of
“new normal” theory (18th CCCPC 3rd Plenary Session, November 2013), which reaffirms that slow
growth is a precondition to an equitable economic structure. The services industry and innovation are
key drivers. In the meantime, China’s construction sector is facing a downturn. An immediate effect of China’s new policy perspective was the National New-Style Urbanization Plan (2014-2020), together with sustainable urban development. These are based on basic human needs, such as quality of life. To stabilise economic conditions, shift to the up-value chain, and rescue the construction sector from its current downturn, the Chinese government has begun implementing actions to increase growth rates in the real estate market.
The bulk of the construction market is dominated by Chinese enterprises. However, niche markets, which are available to foreign companies, can grow quickly and be very profitable. The rapid changes in many aspects of the Chinese society have created opportunities for companies that can offer technologies to support labour productivity, energy saving, and high quality products and services. Entering the Chinese market is both an enormous challenge and a good opportunity for European SMEs.
Table of Contents
1. The Construction Market in China
1.1 A Definition of the Construction Sector
2.2 Real Estate Market Control and Foreign Investment
2.3 Green Housing Policies
2.4 Social Housing Policies
2.5 Builders’ Permits
3. Market Size
3.1 Green Development
3.2 Regional Differences
3.3 Who is Servicing the Market?
3.4 The S-curve Shift
4. Major Trends and Industry Drivers
4.1 Continuing Urbanisation
4.4 Economic Growth
4.5 Social Aspects
4.6 EU-China Partnerships and Initiatives
4.7 Labour Efficiency
4.8 Energy Efficiency
4.9 Design and Quality
5. Opportunities for European SMEs
5.1 China is not about Making a Fast Buck
5.2 The Basic Building Blocks: Know- how, Brand and Niche
Opportunities Offered by the “National New-Style Urbanization Plan (2014-2020)”.......... 26 5.3
5.4 Labour Efficiency
5.5 Energy Efficiency
5.6 Design and Quality
6. Challenges for SMEs
6.1 The Basics: Risk Management
6.2 Timing it Right
6.3 Finding the Right Partner
6.4 Finding the Right Business Model
7. Ways to Enter the Market
7.1 Know your Market
7.2 Define your Business Model
7.3 Looking for a Partner
7.4 Characteristics of the Construction Sector
7.5 Implementation and Follow-up
9.1 Further reading
9.3 Administration and Associations
1. The Construction Market in China
1.1 A Definition of the Construction Sector The construction sector traditionally covers a wide and complex range of activities. Three main intertwined subdivisions – construction, services and materials – will be defined and discussed in this report.
Construction Materials a. Construction Construction refers to project management and building activities usually carried out either in full by contractor companies or partially by subcontractors. Construction activities include building work, civil engineering and Services specialised construction activities.
b. Services Services relate to companies who provide architectural and design services (drawings, calculations, plans and concept design), supervision and survey services, as well as wholesale.
c. Materials This section will cover the materials and technical equipment used in construction activities. Chinese authorities use a classification system 1 which is different from that outlined here. This paper will
categorise construction industry products and services under the following headings:
Building and civil engineering;
2.1 Regulators A number of Chinese government departments are involved in regulating the construction industry. The
major parties involved are listed below:
The Ministry of Housing and Urban-Rural Development of the PRC (MoHURD) (www.mohurd.gov.cn) is responsible for the administration and supervision of construction work including licences, requirements, surveys, designs, tenders and bidding procedures.
MoHURD is also responsible for the supervision and administration of construction enterprise requirements in China;
1 Chinese standard GB/T 4754-2002, category E: Construction.
The Ministry of Transportation of the PRC (MoC) (www.moc.gov.cn) is responsible for the administration and planning of ports, highways, waterways, airport constructions, water conservation projects and hydropower facility projects. MoC is also in charge of project maintenance and quality control. Meanwhile, the Ministry of Transportation also supervise the railways’ administrative functions, as the former Ministry of Railways was dissolved in 2013;
The National Development and Reform Commission of the PRC (NDRC) (www.ndrc.gov.cn) is responsible for macroeconomic planning linked to the construction industry;
The Ministry of Environmental Protection of the PRC (MoEP) (www.zhb.gov.cn) is in charge of environmental protection administration and supervision during the construction process;
The State Administration of Work Safety (www.chinasafety.gov.cn) is responsible for work safety supervision in construction projects;
The Ministry of Science and Technology (MoST) (http://www.most.gov.cn/eng/) is responsible for science and technology development plans, policies, laws, regulations, and department rules relating to drafting and promotion. MoST is also responsible for implementing the work listed above;
The Ministry of Industry and Information Technology (MIIT) (http://www.miit.gov.cn) is responsible for the postal service, the internet, wireless networks, broadcasting, communications, electronics production, and the regulations and development of IT goods and services;
Chinese Academy of Governance (CAG) (http://nsaww.nsa.gov.cn/) is a ministerial-level institution directly affiliated to the State Council. CAG provides training for high-level administrators and policy researchers.
Major European Union Regulators are listed below:
DG Connect (http://ec.europa.eu/dgs/connect/en/content/dg-connect): The Directorate General of CNETC is in charge of cooperation projects in smart cities;
DG Energy (http://ec.europa.eu/energy/): DG Energy focuses on EU energy policy development and implementation. DG Energy is also in charge of the EU-China Partnership on Urbanization and other cooperation projects. These include, among others, the Europe China Clean Energy Centre (EC2 Centre) and the EC-Link Project;
DG Environment (http://ec.europa.eu/dgs/environment/index_en.htm): DG Environment comes up with policies to ensure a high level of environmental protection within the EU as a means to preserve EU citizens’ quality of life;
DG Growth (http://ec.europa.eu/growth/index_en.htm): DG Growth fosters entrepreneurship and growth by reducing the administrative burden on small businesses. The organisation facilitates access to funding for SMEs, and supports access to global markets for EU companies;
DG Regio - Regional and Urban Policy © 2015 EU SME Centre 5 Report: The Construction Sector in China (http://ec.europa.eu/dgs/regional_policy/index_en.htm): DG Regio targets all EU regions and cities to support job creation, business competitiveness, economic growth, sustainable development, and improvements in citizens’ quality of life;
DG Research and Innovation (http://ec.europa.eu/research/index.cfm?pg=dg): DG Research and Innovation develops and implements R&I policy to increase Europe’s competitiveness and growth in innovation, job creation, and tackling the main challenges facing societies both now and in the future. DG Research and Innovation takes charge of the EU-China Innovation Cooperation Dialogue, which also includes a section focused on urbanisation;
DG Trade (http://ec.europa.eu/trade/): DG Trade is responsible for policy drafting and implementation in regard to commercial relationships with countries outside the EU.
2.2 Real Estate Market Control and Foreign Investment China’s housing market went through another tough period in 2014. The average housing price in the top 100 cities decreased continuously from May until the end of the year. The overall sales volume also decreased by 9.1% compared with 2013. In light of this, the Chinese government simplified application procedures to facilitate foreign investment in the real estate market. The real estate industry was reclassified from “restricted” to “permitted” in the latest version of the Catalogue for the Guidance of Foreign Investment Industries. Moreover, restrictions were lifted on foreign investment in land development, high-end hotels, office buildings, international exhibition centres, and the construction and operation of large theme parks. Restrictions were also lifted on foreign shareholding limits for infrastructure constructions and operations, such as urban subways and light railways.
Conditions still hinder foreign investments, however, leading to disparities between local and overseas companies. This is particularly the case for registered capital requirements. Foreign investment companies are required to register a minimum of 50% of their total capital investment. In contrast, local investment companies are required to register a minimum 30% of their total capital investment. So while investments are encouraged or permitted under the Catalogue for the Guidance of Foreign Investment Industries, foreign investors still need to be aware of both the necessary approvals and the potential regulatory restrictions linked to their investment interests.
2.3 Green Housing Policies In 2015, China’s Ministry of Housing and Urban-Rural Development (MoHURD) approved the “green building evaluation standard” related to the national standard (Numbers for GB - T50378-2014) that replaced the previous standard (GB3T50378-2006) on January 1st of this year. The change will further standardise market rules and competitive regulations for green building industries, as well as promoting industry chain design and technical innovation. The green housing industry is expected to bring about a further reshuffling of the market.
The new green building evaluation standard uses a sub-item allocation system. A total score of 45 to 50 points is classified as “one star”; 60 points is “two star”; and 80 points is “three star”. The new standard gives extra credit to green projects, meaning innovative green building projects receive more evaluation points. Experts believe that this scheme will encourage green building technology, management innovation and overall improvement.
© 2015 EU SME Centre 6 Report: The Construction Sector in China The hope is that this could start a virtuous cycle. By conforming to the requirements of the new standard, companies could increase innovation and achieve prominent scores for green residential projects.
Conversely, those projects that do not possess a competitive advantage will face challenges, or even be eliminated from the market. This will further improve green residential market competition, and promote green residential initiatives.
It is important to note that the new version of the green building evaluation standard is also viewed as a steel structure development opportunity. Data shows that steel structures make up less than 5% of China’s total housing at present. However, this figure is over 40% in developed countries. Steel structures can meet the new demands for energy-saving and environmental protection, and are being actively promoted.
Xiamen, Hainan, Shandong and other regions have released green building action plans, and launched a series of preferential policies to encourage development of the green residential market. The market will have the support of a number of government policies, such as deed tax relief and diversified incentives.
2.4 Social Housing Policies The China National Urbanization Plan on New Urbanization (2014-2020): Turning Migrants into Urban Citizens (cont.) envisages the settlement of a further 100 million urban dwellers by 2020, raising the urbanisation rate to 60%. Further large-scale rural-to-urban migration makes it all the more urgent to address the question of migrants’ status. Access to social housing is projected to nearly double to at least 23% by 2020.
The total annual costs of all urban public services, infrastructure, and social housing is expected to average 6.1 percent of GDP between 2013–30, with a peak of 7.3 percent in the early part of this period.
A top-down approach to social housing exacerbates distortions in the housing market and results in a mismatch of supply and demand. A key challenge for local governments in China is to make sure that targets and objectives for social housing are determined by central government.
These policies outline the range and level of coverage. They even stipulate planning, design, size, quality, and safety requirements, thereby creating a system of unfunded mandates for local governments.